Here's Why We Are Cutting This Holding's Rating to a 'Sell'
Two issues, including one 'nonstarter,' raise many questions. This is our plan for the shares.
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Shares of The Trade Desk TTD are trading sharply lower Thursday, following the company's quarterly results and post-earnings conference call last night after the bell.
The company reported mixed December-quarter results and light top-line guidance for the current quarter. That revenue guide for the current quarter still equates to high-teens revenue growth compared to the year-ago quarter. However, we are dropping our rating on TTD to Four from One, due to a combination of margin concerns and management credibility, items that came to light during the conference call.
It is the sharp drop in profitability that is weighing on the shares, in part because it means a pronounced downward reset in EPS expectations. Compared to the 47% adjusted EBITDA margin posted in the December quarter, Trade Desk telegraphed just a 25% figure for the current quarter. Granted, we are seeing revenue drop sequentially but that level of margin degradation even compared to the 33% figure posted in the March 2024 quarter raises many flags for us.
On the earnings call, management discussed a 15-point action plan to turn the business back into growth mode, one that includes some heavy investment. While we understand companies need to invest for future growth, candidly a 15-point plan is far more complicated than it needs or it is a sign that management is not sure what to do even as the tailwinds of digital advertising are blowing. That raises more questions for us as does management’s comment that it is facing some big strategic decisions.
The combination of management credibility and eroding margins is not a winning combination. It also violates our focus on companies benefiting from structural tailwinds poised to deliver superior EPS growth. While that violation is enough to warrant a downgrade to a Four rating, the management credibility issue is a non-starter for us.
Because we are seeing a pronounced and most likely overdone move in TTD shares, we will bide our time and begin working our way out of them as the near-term pressure fades. We have reason to think this will occur as the Wall Street herd defends the shares even as they slash their price targets in the process.
At the time of publication, TheStreet Pro Portfolio was long TTD.
