Does valuation matter any longer? It’s a valid question as tech stocks continue to march upwards without taking a break. Ad-tech company Trade Desk (NASDAQ:TTD) is a case in point. TTD stock is hovering near its all-time high even while many businesses are struggling and don’t have much money to spend on digital advertising.
Trade Desk is in the business of helping companies publish and track their digital ad campaigns. However, as Trade Desk Chief Executive Jeff Green put it, “the advertising industry hit the pause button early in the second quarter due to uncertainty around the COVID-19 pandemic.”
The economic uncertainty associated with the novel coronavirus hasn’t been resolved yet and might persist for many more months. Yet, it appears that TTD stock traders have already priced in a full recovery.
Don’t get me wrong: Trade Desk is doing well overall and there’s no need to panic-sell TTD stock if you already own it. That being said, it’s advisable to wait for the share price to pull back and reflect a more sensible valuation before taking a new position or adding to your current one.
A Closer Look at TTD Stock
The first aspect of TTD stock that stands out to me is the trailing 12-month price-earnings ratio of 186. That’s problematic for value-focused investors who prefer to buy stocks that are relatively underpriced.
Granted, the share-price decline in February and March was excessive, albeit brief. From the Feb. 19 short-term peak of around $315 to 52-week low in mid-March of $136, TTD stock’s share-price decline was painful but mercifully quick.
What transpired afterwards, however, was an epic rise in TTD stock. We’re not just talking about a bounce to the prior high point. Rather, it’s been a relentless climb as TTD shares touched the $500 level in August.
Moreover, the daily trading volume for TTD stock hasn’t been strong lately. It will require a great deal of effort for the bulls to prove that they’re not exhausted at this point. After all, no stock can go up forever without taking breaks.
Analyzing Trade Desk’s Q2
After Trade Desk reported its second-quarter fiscal results, after-hours traders pushed the TTD stock price up 5%. Apparently, they were willing to adopt a glass-half-full perspective on the data.
Whether the numbers are good or bad depends on one’s perspective. For the second quarter, Trade Desk reported $25.1 million in net income, which would translate to 52 cents per share. Are these stats a cause for celebration?
Not necessarily. During the same quarter of the previous year, Trade Desk posted net income of $27.8 million, or 58 cents a share. So, the recently reported numbers certainly don’t represent a year-over-year improvement.
Moreover, Trade Desk posted quarterly adjusted earnings of 92 cents per share, which is less than the 95 cents per share announced in the comparable quarter of the prior year.
Accentuating the Positive
Trade Desk also announced quarterly revenues totaling $139.4 million, a disappointing figure compared to the $159.9 million recorded in the year-ago quarter.
Even with all of this in mind, investors should never underestimate companies’ ability to cast events in a positive light. Incredibly, Green actually managed to spin businesses’ economic hardship as a net positive for Trade Desk:
“As much as the global financial crisis of 2008 and ’09 caused many advertisers to consider data-driven strategies for the first time, I believe this crisis will cause advertisers to leverage more data more aggressively than ever as they look to make every dollar work as hard as possible.”
Skeptical minds might have difficulty accepting this narrative. Nevertheless, Trade Desk evidently is sticking to its story as the company now projects third-quarter revenues in the lofty range of $177 million to $181 million.
As a point of reference, Wall Street analysts had projected a more grounded $158.7 million in third-quarter revenues for Trade Desk.
The Bottom Line
Given TTD stock’s current valuation, it appears that the trading community has bought into Trade Desk’s spin job. Or, at the very least, traders have priced in the best-case scenario for Trade Desk’s third quarter.
Valuations do still matter, and skeptical-minded investors shouldn’t buy TTD shares until the price more accurately reflects the reality of a troubled economic landscape.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.