The Trade Desk (NASDAQ: TTD) is a stock which I picked up again last March as I was impressed by blazing revenue growth in the previous years. Yesterday, it announced its financial results for the fourth quarter of the fiscal year 2024 (FY 2024).
Revenue for the quarter grew by 22% year-on-year (YOY) to US$741 million, and adjusted EBITDA is up by 23% to US$350 million for the same period.
While the numbers appeared healthy, they missed Trade Desk’s own internal estimate of US$756 million and US$363 million respectively.
What made it worse is Trade Desk provided an uninspiring 1Q 2025 guidance of US$575 million revenue (+17% YOY) and US$145 million adjusted EBITDA (-10% YOY).
Consequently, market hammered its stock price down by 33% yesterday.
My initial thought was that the market had overreacted. While the reported and guided revenue are lower, they are still quite decent.
Moreover, CEO and Founder Jeff Green has clarified that the reduced growth is not due to the lack of opportunity or increased competition, but due to small execution errors. These errors occurred during a period of significant strategic transitions.
Upon further thinking, I changed my mind.
The plunge is justifiable given Trade Desk’s previously steep valuation. It was priced for perfect execution, and any misstep was bound to have a significant impact.
As illustrated by the above charts, Trade Desk’s Price to Free-Cash-Flow (P/FCF) was about 120x before yesterday’s plunge.
It’s exuberantly high!
Although it has traded at even higher P/FCF multiples historically, its growth rate at that time, from a much smaller base, was considerably stronger.
Despite the still-high valuation, I believe the current price is justifiable, assuming the company can maintain a roughly 20% growth rate over the long term.
After years of success, a single quarter (or even a year) of underperformance is unlikely to indicate a fundamental deterioration.
For now, I am buying into the management’s story that the recalibration will position the company for an even stronger future.
As such, I have taken this opportunity to add to my position, which only takes up about 1.3% of my overall portfolio.
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