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Trade Desk Stock’s Consolidation Efforts Create New Opportunities

While the pandemic of 2020 was a terrible human tragedy, it spurred life into digital sectors. Companies who serve anything on the internet became hot commodities on Wall street. When everything is on the internet that’s where the advertisers go. The Trade Desk (NASDAQ:TTD) serves that purpose so it’s not a surprise to see TTD stock also extremely active.

TTD stock
Source: Shutterstock/ Bella Melo

The whole world saw the urgency to get digital and fast. E-commerce has never been busier, that’s why Amazon (NASDAQ:AMZN) grew its revenues 50% over 2019.

I used the word “active” on purpose because TTD is a momentum stock. It runs fast and either directions so it’s not for the weak stomachs.

Case in point, it fell off almost 42% before it bottomed earlier this month. Then it rallied another 42% in 11 days where it now lies between the highs and the recent lows. This consolidation stent is important because it could be the base of a new rally.

The Company Has Fierce Competition

This is the kind of stock that needs the market to rally so it can too. As an investment, it makes sense to own it for the long term. It competes with Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG) and Facebook (NASDAQ:FB). Its share of that advertising pie is still infinitesimal relative to the two behemoths. But therein lies the opportunity because it’s growing at a much faster rate.

If the stock market in general holds up for the next few months, TTD stock will find buyers. Therefore, owning it at these levels could also serve as a short-term opportunity.

The charts lend clues and in this case they suggest support under $692 per share. Conversely, if price can cut through the resistance into $770, it could accelerate from there. It won’t be easy because it’s a thick layer of past failures. But algorithms love to chase runaway breakouts in stocks like this.

The Trade Desk (TTD) Stock Chart Showing Upside Potential vs Downside Risk
Source: Charts by TradingView

In cases where stocks move fast but have good fundamentals, I like using options. This way I can be bullish now but leave a lot of room for error. Instead of buying shares now without any buffer, I prefer selling puts to own them lower. For example, I can collect $6.50 to sell the TTD April $600 put. This means that even if the stock falls 18% I would still be even. Meanwhile, an investor that bought shares outright today would have already lost 18% of their investment. If the stock rallies then I profited without out expenses, but no more than the amount I collected.

It is important to know that there’s also extrinsic risk. Even though the fundamental thesis around The Trade Desk is solid, if the stock markets are falling, it will too. Great stocks fall to no fault of their own often.

The competition from Facebook and Alphabet is fierce but it’s not a worry. This is a gigantic world and there’s enough business for all to prosper. The expansion rate of TTD’s business relies only on its management’s competency. There’s no ceiling above them from competitive efforts.

TTD Stock Is Not Bloated

The team seems competent enough so far and the financial performance summary proves it. They almost doubled their revenues in three years, and net income tripled. All this while increasing profit margins and reducing debt-to-asset ratios. Operating cash flow grew five times since 2018. Clearly, the score card suggests that the team earned an A-plus.

The Trade Desk (TTD) Financial Metrics Showing Healthy Growth Rates
Source: Charts by TradingView

Critics could gawk at the a 151 price-to-earnings ratio. Yes, it is high, but it’s not the problem. It is normal for upstarts to spend a lot when delivering blistering growth.

The price-to-sales is the potential concern since it has 44 years of full years sales already in the stock price. Investors expect a lot from the future so there is room for more disappointment. For now it’s a concern but not a reason to short it. It would be fair to say that “value” will not provide stock support yet.

On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2021/03/trade-desk-stocks-consolidation-efforts-create-new-opportunities/.

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