The Trade Desk, Inc. (NASDAQ:TTD) reported a robust Q1 card, but its Q2 guidance showed that even the Open Internet demand-side platform (DSP) leader couldn’t escape the macro headwinds. Despite guiding a revenue YoY growth of 30% for Q2, its guidance for adjusted EBITDA was a little disappointing. Management expects its adjusted EBITDA to increase by just 2.6% YoY. Furthermore, we have also noticed a weaker GAAP EBITDA margins trend over the past two quarters, raising another red flag.
Our calls on TTD stock for 2022 have not been on point relative to our performance in 2021. We had thought that TTD could evade the digital advertising headwinds. Therefore, we didn’t place enough emphasis on the warnings in its price action analysis, which we considered carefully in 2021. As a result, the calls in 2022 have been pretty disappointing for us.
Furthermore, despite the hammering in TTD stock in 2022, it still trades at a significant premium. Therefore, the market has astutely digested its premium, given the massive double top bull trap in 2021.
However, we think the stock is likely at a near-term bottom as it held its May lows despite the recent scare from Snap’s (SNAP) revised guidance.
We will stick with our Buy rating for TTD stock as it is at the bottom of its consolidation range. However, we exhort investors to use a stop-loss risk management system to protect the position against further steep drawdowns. In addition, we don’t favor the double top bull trap. Therefore, given its premium multiple, if the current level does not hold, it could portend more pain ahead.
Don’t Ignore Its Slowing Growth
The consensus estimates suggest that The Trade Desk could report above management’s guidance for FQ2 (no surprises here, as 13/15 analysts have a Buy call). The estimates project revenue growth of 30.6% and an adjusted EBITDA growth of 4.7%. As a result, we think it raised a red flag over the company’s profitability growth cadence, despite what seems like robust topline growth. It was also picked up by an analyst on the call, as management elucidated (edited):
We do expect in 2022 to increase the pace of our investment as we focus on the long-term growth of our business. And that’s got a support from a very strong business model that produces strong free cash flow and has a really, really solid balance sheet. Our Q2 forecast includes accelerating hiring across the business. We also expect our in-office expenses to start ramping this year to pre-pandemic levels. (The Trade Desk’s FQ1’22 earnings call)
However, investors should note that the company’s OpEx cadence could impact its bottom-line growth through FY22-23, as seen above. While we think the company is gearing for long-term growth, there could be higher execution risks in a more demanding macro backdrop. Coupled with TTD stock’s growth premium, the stock could be punished further if the execution was subpar.
Notwithstanding, we noticed that its GAAP EBITDA profitability has improved from FQ4’s -4.5% to FQ1’s -1.5%. The fall in its stock-based compensation (SBC) margins has helped enhance its bottom-line performance. Nevertheless, we are slightly concerned with the margins profile moving forward due to the lack of underlying operating leverage improvement through FY22. Therefore, the company’s aggressive use of SBC could continue to impact its GAAP EBITDA profile in FY22. Hence, we urge investors to pay attention to its EBITDA margins moving forward.
Price Action Suggests A Near-Term Bottom – But With Caution
A closer look at TTD stock’s monthly chart unveils a chilling caution that we should have been more circumspect. It had a very bearish double top bull trap in November/December 2021. It drew in the last of the buyers before the market flushed out its massive gains from 2020.
Currently, we think the stock is testing a near-term support level, as seen in the weekly chart. It seems to be holding. But, if it holds and doesn’t break down further, we will be more confident that the digestion from its double top bull trap has been completed.
Is TTD Stock A Buy, Sell, Or Hold?
TTD stock last traded at an NTM normalized P/E of 52.91x and an NTM FCF yield of 2.07%. Undoubtedly, these are relatively aggressive valuation metrics in a harsher macro environment. Therefore, the company must execute impeccably to lift investors’ sentiments in supporting its growth premium. We are not doubting CEO Jeff Green & team’s ability to continue executing well. We are merely highlighting the execution risks that investors need to account for.
Notwithstanding, we reiterate our Buy rating on TTD stock. However, we urge investors to implement a stop-loss risk management system to protect against significant drawdown if the support level fails to hold.