Why The Trade Desk Stock Tumbled Today

Key Points

• The Trade Desk's second-quarter results were in line with estimates.

• The walled gardens it's competing with appear to be getting stronger.

• Revenue growth is expected to decelerate in the third quarter.

• 10 stocks we like better than The Trade Desk ›

Shares of The Trade Desk (NASDAQ: TTD) were taking a dive for the second time in three earnings reports today. The leading independent demand-side platform (DSP) in adtech posted results that were in line with expectations, but its guidance confirmed that competition was becoming more of a threat to the business.

As a result, several Wall Street analysts downgraded the stock this morning, and shares were down 38.1% as of 10:08 a.m. ET.

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The Trade Desk runs into a wall

The second-quarter results weren't bad. Revenue rose 19% to $694 million, which topped the consensus at $686 million. The company touted progress in several channels, including connected TV, retail media, and supply chain optimization, and its Kokai AI platform is being adopted by its customers.

On the bottom line, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose 12% to $271 million, and adjusted earnings per share increased from $0.39 to $0.41, which matched estimates.

The Trade Desk's results make it clear that its growth rate is slowing, which is a problem for a stock that has historically traded at a high multiple.

Several analysts downgraded the stock on the update. Bank of America double-downgraded the stock to underperform, saying concerns about competitive pressures were justified.

At least three other analysts also cut their ratings as it appears that the "walled gardens" that The Trade Desk competes with like Netflix, Amazon, Meta, and Alphabet are becoming stronger.

What's next for The Trade Desk

Looking ahead to the third quarter, the company called for revenue of at least $717 million and EBITDA of about $277 million, indicating margins are expected to fall slightly on a sequential basis. The revenue forecast, which compares to the average estimate at $722 million, implies growth of at least 14%, a clear sign that growth is decelerating.

Given that, the sell-off looks justified as The Trade Desk now trades at a price-to-earnings ratio of 31 based on adjusted earnings, which seems like a fair price now that its growth prospects are in doubt.

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Bank of America is an advertising partner of Motley Fool Money. Jeremy Bowman has positions in Amazon, Bank of America, Meta Platforms, Netflix, and The Trade Desk. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, Netflix, and The Trade Desk. The Motley Fool has a disclosure policy.