The Trade Desk Stock Just Crashed. Should Investors Buy the Dip?

Buying the dip sounds easy. The hard part is knowing whether you're buying a temporary setback or the start of a long-term decline.

That's the question investors face with The Trade Desk (NASDAQ: TTD).

After another disappointing earnings report, the stock plunged as slowing growth and weaker guidance shook investor confidence.

But here's the interesting part. The company remains profitable. Customer retention is still above 95%. Digital advertising continues to grow. Yet the stock has lost a significant portion of its value.

That disconnect tells you something important. The market isn't pricing The Trade Desk based on what it is today. It's pricing what investors think it could become tomorrow.

Image source: Getty Images.

The bull case is still largely intact.

It's easy to forget that The Trade Desk still operates one of the largest independent digital advertising platforms in the world.

Brands continue to shift advertising budgets toward digital channels, connected TV continues to replace traditional television, and advertisers increasingly want measurable returns on every marketing dollar.

Those trends haven't disappeared.

Neither has The Trade Desk's ability to benefit from them. The company still retains more than 95% of its customers, suggesting that advertisers continue to find value in the platform. It also continues to invest heavily in Kokai, its AI-powered platform, which management believes can improve campaign performance and make the open internet easier to navigate.

If Kokai consistently delivers better results, advertisers have a strong reason to keep increasing their spending. That's still a compelling long-term opportunity.

But the market is, rightfully, asking a different question.

The problem isn't whether The Trade Desk is a good business. It's whether it's still an exceptional one.

For years, investors happily paid premium valuations because they believed three things:

• Growth would remain above 20%.
• Management would continue executing almost flawlessly.
• Competition wouldn't materially change the story.

Today, none of those assumptions looks certain. Amazon has become a much larger force in digital advertising. Google and Meta continue strengthening their AI capabilities. Meanwhile, The Trade Desk has reported slower growth and weaker guidance than investors expected. For perspective , revenue grew just 3% this quarter, and is expected to decline in the coming quarter.

In other words, the stock now has something it hasn't faced in years: It has to prove itself again.

So, should investors buy the dip?

The answer to this question depends on one thing: Do you believe The Trade Desk can return to its good old days as a consistent growth company?

If the answer is yes, today's valuation could look attractive over time. As of writing, the stock trades at a price-to-earnings (PE) ratio of 15.7 times, a level not seen since 2017. If the answer is no, the stock may stay inexpensive for a long time, even if the business remains healthy.

That's why this doesn't look like a traditional buy-the-dip opportunity, in which the underlying business remains the same despite a decline in the share price. Instead, it looks like a prove-it opportunity.

In this case, the next few quarters will matter enormously. Investors should watch for signs that revenue growth begins to accelerate again, whether advertisers continue to increase their spending on the platform, and whether the company can incorporate AI to help advertisers achieve better returns on investment.

If those pieces fall into place, investors' confidence could return. If they don't, the market may conclude that The Trade Desk has entered a new phase, one where slower growth (or even no growth) becomes the norm. In the latter scenario, today's valuation is not really a bargain.

What does it mean for investors?

Buying the dip works best when the market has overreacted to temporary problems that a company is facing. On the other hand, buying a value trap happens when investors mistake a changing business for a cheaper stock.

Today, The Trade Desk sits somewhere between those two outcomes. The company still has the ingredients of a long-term winner. But it no longer gets the benefit of the doubt.

What the company needs to do is to regain investors' trust – and that starts by delivering improving results in the near future.

In short, investors should buy the dip only if they are convinced that the company's recent challenges are temporary, not structural.

Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Meta Platforms, and The Trade Desk. The Motley Fool has a disclosure policy.