Trade Desk Named 'Strong Buy' Amid Ugly Freefall
The digital marketing firm has seen a harsh reaction to its latest guidance but I'm opening a position.
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On Thursday evening, The Trade Desk TTD released the firm's second quarter financial results, and the stock has been obliterated.
As I bang out this late Friday morning piece, the stock is down more than 39%. U. G. L. Y. You ain't got no alibi. You're ugly.
For the three-month period ended June 30, The Trade Desk posted an adjusted EPS of $0.41 (GAAP EPS: $0.18) on revenue of $694.039 million. Both the adjusted and "as reported" bottom-line results were in line with expectations while the top-line print did slightly beat Wall Street. That revenue print also reflected year-over-year growth of 18.6%.
The firm also announced that Alex Kayyal will join the firm as CFO effective August 21. Kayyal will report directly to CEO Jeff Green and will continue to serve on the company's board of directors. Outgoing CFO Laura Schenkein will remain with the firm through the end of the year to help with the transition. The firm also announced that Omar Tawakol has been appointed to the board of directors.
Why the Beat Down?
It has to do with the guidance. For the current quarter, the firm projected revenue of at least $717 million, resulting in adjusted EBITDA of approximately $277 million. The revenue guidance was shy of expectations and would amount to year-over-year growth of just 14%. This would be a second consecutive quarter of sharp year-over-year decelerating growth. This firm was growing sales in the mid-to-high 20% range just a year ago.
Many analysts were watching to see if the firm could keep growing sales in the 20% range as the competition continues to heat up. Amazon's AMZN Delivery Service program is believed to be taking share away from The Trade Desk. The avalanche of downgrades and sizable reductions in target prices began.
Avalanche
- Jessica Reif Ehrlich of Bank of America, who is rated at five stars (of five) at TipRanks, double downgraded TTD from a "Buy" rating all the way down to "Underperform." Reif Ehrlich took her target price all the way down from $130 to just $55.
- Scott Devitt of Wedbush, who is also rated at five stars by TipRanks, downgraded TTD from an "Outperform" rating to "Neutral" which is "buy-equivalent down to hold-equivalent." Devitt took his target price all the way down to $68 from $90.
- Matthew Swanson of RBC Capital, who is rated at three stars by TipRanks, did reiterate his "Outperform" or buy-equivalent rating on TTD, but also cut his target price from $100 down to $90.
- Ygal Arounian of Citigroup, who is rated at four stars by TipRanks, downgraded TTS from a "Buy" rating to "Neutral" or hold-equivalent while cutting his target price from $90 to $65.
- Nat Schindler of Scotiabank, who is rated at four stars by TipRanks, reiterated his "Hold" rating on TTD while cutting his target price from $83 all the way to $60.
Fundamentals
It really does not matter right now. The stock is in free fall and Wall Street has abandoned the name. I won't go through the fundamentals line by line like I usually do, but I will say that the balance sheet is in good shape. The important ratios are healthy. The asset side of the balance sheet is not reliant upon intangibles. There is no debt on the books either. Operating and free cash flows are still quite robust as well. This sell-off may be opportunity knocking. Let's take a look.
The Chart
Readers will see that TTD fell out of bed on Friday morning after earnings. The precipitous fall was set up by a rising wedge pattern of bearish reversal. Readers will also see that this created a new gap, which will now be a second consecutive unfilled gap going back to February. What's happening is that TTD is being re-rated, It's no longer a growth stock.
Readers will also see that the stock hit brick wall resistance at the 50% retracement level (or halfway back point) of the early December through early April sell off for this name.
That level happened to coincide with the stock's 200-day SMA, meaning that professional money poured out of the stock on Friday and the selling was exacerbated when there was no attempt made to put up a fight at the 50-day SMA.
Relative strength has plummeted across the River Styx, while the daily MACD is now postured as one might have expected: quite bearishly.
My Opinion?
The Trade Desk is a strong buy down to the lows of early April.
After this piece hits publication, I will be taking an entry-level sized long position in TTD. I expect that I will have to manage the position and will leave room for additions down to that early April level. At all times, my 8% rule will be in effect in order to enforce a reduced tolerance for risk.
Target? Nothing technical. Once I'm up 20%, if there is no new tech nail pattern in place that tells me otherwise, I'm saying "sold." Position sizing in my opinion should max out at sub-medium.
At the time of publication, Guilfoyle had no positions in any securities mentioned.
