The Trade Desk Stock Tanks on Earnings

Shares of The Trade Desk (NASDAQ: TTD) completely tanked on Monday despite reporting strong first-quarter results that topped expectations.

The advertising platform also issued strong guidance for the second quarter and even announced a stock split—which investors typically cheer—yet the stock still sold off relentlessly as investor sentiment for growth stocks has soured dramatically over the past three months.

As of 5 p.m. EST, The Trade Desk shares were down 25.98%.

Crushing Wall Street’s expectations

Revenue in the first quarter increased 37% to $219.8 million, which was better than the consensus estimate of $217.3 million. That translated into adjusted net income of $70 million, or $1.41 per share, representing a significant beat compared to the $0.81 per share in adjusted profits that Wall Street analysts were forecasting. 

The Trade Desk continues to enjoy strong customer retention of over 95%, while the company also partnered with Walmart (NYSE: WMT) during the quarter to launch a new demand side platform (DSP) that leverages The Trade Desk’s technology to analyze shopper data and sales measurement information. 

The company continues to garner support for Unified ID 2.0, a new ad targeting framework it is pioneering to replace third-party cookies. AT&T’s (NYSE: T) ad unit Xandr, sports streaming platform fuboTV (NYSE: FUBO), and AcuityAds (OTC: ACUIF) have all recently pledged support for Unified ID 2.0, among other industry players.

A rosy outlook

Guidance for the second quarter also came in better than expected, with revenue forecast in the range of $259 million to $262 million. Analysts are looking for just $251.3 million in sales during the second quarter. Adjusted EBITDA is expected to be at least $84 million.

The Trade Desk notes that its business has been meaningfully impacted by the COVID-19 pandemic, which has led to higher uncertainty than normal due to changing macroeconomic conditions caused by the public health crisis. The guidance assumes that the economy continues to recover and that economic conditions remain stable.

Splitting 10-for-1

The Trade Desk also said that its board of directors has approved a 10-for-1 stock split, with shareholders of record as of June 9 receiving an additional nine shares. The new shares will be distributed on June 16 and the stock will begin trading on a split-adjusted basis on June 17. That corporate action will divide the stock price by 10.

Historically, the market generally reacts favorably to stock splits even though they do not result in any change to a company’s fundamentals. A lower share price supports the perception that the stock is more affordable in absolute terms, which can theoretically broaden the investor base. 

Growth remains out of favor

It’s unclear why investors are so disappointed with The Trade Desk’s news, as there were positive announcements on all fronts. The Trade Desk is benefitting from the ongoing shift of advertising dollars to connect TV platforms, which is expected to persist for years as consumers shift away from linear TV due to cord cutting.

The broader context is that growth stocks have been punished for the past three months after putting up strong gains over the past year. The rally had potentially pushed valuations too high, in which case a pullback can be somewhat expected.

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Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends The Trade Desk. Millennial Money is part of The Motley Fool network. Millennial Money has a disclosure policy.

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