Can The Trade Desk Bounce Back After Last Week's 21% Drop?

MarketsMotley Fool

The Trade Desk (NASDAQ: TTD) may be on the leading edge of programmatic advertising, but last week it was more on the bleeding edge for its investors. Shares of The Trade Desk plunged 21.1% on the week, sliding after effectively lowering its guidance for the fourth quarter.

The Trade Desk's financial report is impressive if we focus on the third quarter's performance. Revenue soared 50% to $79.4 million, with its mobile and connected TV segments growing even faster. Analysts were only holding out for $76.9 million in revenue, and it's hard to blame them, as The Trade Desk's own guidance was targeting just $76 million for the period. The Trade Desk's profit of $0.35 a share as net income soared 63% blasted through the $0.27 a share that analysts were modeling.

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However, then we get to the problematic guidance. The Trade Desk beat its own revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) forecast for the third quarter by $3.4 million on both fronts, but it only raised them by $3 million and $2 million for all of 2017, respectively. It is effectively lowering its earlier implied guidance for the fourth quarter by $0.4 million in revenue and $1.4 million in adjusted EBITDA.

It all "ads" up in the end

Programmatic advertising is all about letting data-fueled decisions allocate marketing spend across video, mobile, native, audio, and TV. The Trade Desk is in the right place at the right time, and it's gaining market share. Customers are happy, as client retention has clocked in at 95% or better for four years. However, when you're one of this year's hottest stocks -- and the shares are still up 84% in 2017 even after last week's slide -- everything has to be perfect. The Trade Desk's guidance for the fourth quarter was far from perfect.

Revenue growth is expected to decelerate to 40%, The Trade Desk's weakest showing as a public company. Slowing top-line increases isn't a surprise as a growth company gets larger, but The Trade Desk is also eyeing a mere 19% spike in adjusted EBITDA given margin-tightening pressures.

A couple of analysts rushed to the stock's defense. Tim Nolan at Macquarie thinks the stock's near-term correction presents a buying opportunity. Management's bullish demeanor remains unchanged as the ad industry keeps trending to automation.

Shyam Patil at Susquehanna agrees and is boosting his price target from $66 to $70. He sees The Trade Desk as a the undisputed market leader with superior technology as it gobbles up market share. Patil also sees emerging opportunities, and the businesses' momentum makes last week's dip a buying opportunity.

The Trade Desk stock begins the new trading week on an unfortunate streak of having moved lower in four consecutive trading days. The outlook for the current quarter is troublesome, particularly the dramatic slowdown in adjusted EBITDA. However, Patil argues that The Trade Desk is still in this niche's early innings. There will be ups and downs, but one bad week doesn't spell the end for a market darling that has nearly tripled since going public last year.

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Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends The Trade Desk. The Motley Fool has a disclosure policy.