Is The Trade Desk Stock a Buy After Its Stunning Reversal?

The Trade Desk (TTD -2.54%) stock initially withered on Wednesday, falling as much as 8% in pre-market trading, after the company released its quarterly financial results. However, the plunging stock price was short-lived and The Trade Desk stock quickly rebounded, moving briefly into positive territory.

Wall Street had lofty expectations for the programmatic advertising specialist and the company sailed past the bar set by investors. So what caused the initial drop and why has the stock rebounded so swiftly?

Image source: Getty Images.

Soaring costs?

For the first quarter, The Trade Desk reported revenue of $315 million, up 43% year over year, accelerating from 37% growth this time last year. The company delivered adjusted earnings per share (EPS) of $0.21, up 50% year over year. This was enough to beat analysts’ consensus estimates for revenue of $304.7 million and adjusted EPS of $0.15. 

However, investors seemed to focus on the bottom line, which — on a GAAP basis — translated to a loss per share of $0.03, down from a gain of $0.05 in the prior-year quarter. The culprit was a massive increase in The Trade Desk’s general and administrative expenses, which grew to $125.8 million, an increase of 143%, and drove the entirety of the company’s net loss.

This initially gave investors pause, because in most cases it would be a cause for concern. Yet, those who dug a little deeper discovered things weren’t as bad as they appeared at first glance. In fact, The Trade Desk telegraphed this was coming.

The devil is in the details

During the fourth-quarter earnings call with analysts back in February, CFO Blake Grayson provided details of what was to come (emphasis mine):

In 2022, we anticipate our stock-based compensation to rise from our normal run rate … driven by approximately $265 million of stock-based compensation expense we expect to include in 2022 related to the long-term CEO performance award.

CEO Jeff Green closed out last year in fine fashion, achieving certain benchmarks that triggered the award of roughly $616 million in stock-based compensation. That amount will be paid out over the coming four years, with a chunk of that coming due in 2022.

On the first-quarter earnings call, Grayson confirmed that excluding stock-based compensation, operating expenses came in at $207 million, up 30% year over year, and easily below The Trade Desk’s revenue growth.

Is the stock a buy?

Its better-than-expected results aside, there are plenty of reasons to be bullish on The Trade Desk. Last year, the company debuted Solimar, the latest version of its digital ad-buying platform, which allows marketers to use business objectives to drive results, integrating their own first-party data to improve targeted advertising.  

Not content to rest on its laurels, The Trade Desk just released OpenPath, which provides clients with direct access to the ad inventory of premium publishers, side-stepping “walled gardens” like Alphabet‘s Google. 

Finally, The Trade Desk is chasing a massive opportunity. Its total addressable market of $750 billion is expected to climb to roughly $1 trillion over the next several years. As the fastest-growing player in the programmatic advertising market, the company is well-positioned to capture more than its fair share of this opportunity.

The Trade Desk is the industry leader and continuing disruptive force in the ad-tech space, yet its stock currently trades at roughly 60% off its recent high. That makes the company a buy and one of my highest conviction stocks.