Why The Trade Desk Stock Slumped 37% Last Month

Key Points

• The Trade Desk reported disappointing earnings last month.

• Its revenue growth is slowing down, which is concerning investors.

• Shares of the stock still trade at a high price-to-sales ratio.

• 10 stocks we like better than The Trade Desk ›

Shares of The Trade Desk (NASDAQ: TTD) fell by a sharp 37.1% in August, according to data from S&P Global Market Intelligence. As of this writing on Sept. 3, The Trade Desk is down 55% this year and in the middle of its worst price drawdown ever.

Investors are concerned about slowing revenue growth for this advertising innovator, which has previously traded at a premium valuation. Here's why The Trade Desk slipped yet again in the month of August.

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Slowing growth, high expectations

On Aug. 7, The Trade Desk reported its second-quarter earnings. The advertising technology company that provides solutions for ad buyers outside of the large internet walled gardens had 19% year-over-year revenue growth in the quarter. Sales hit $694 million, with net income of $90 million for a margin of 13%.

In the same period a year ago, The Trade Desk reported revenue growth of 26%. Growth has begun to slow for this advertising disruptor, and even slower growth is expected in the third quarter, with guidance calling for 14% year-over-year gains to $717 million. In recent years, The Trade Desk has been a much faster grower. The company claims a huge addressable market for its decentralized targeted advertising across internet assets like connected TV, webpages, and even podcasts as an alternative to the likes of Google or Instagram.

In fact, Meta Platforms grew its advertising revenue by 21% year over year last quarter, which was actually faster than The Trade Desk at a much larger scale. Whatever gains The Trade Desk made in targeted digital advertising are now going in reverse, and investors are worried. The stock previously traded at a high valuation, with a price-to-sales ratio (P/S) of 20 before this dip.

Image source: Getty Images.

Is The Trade Desk stock a buy?

Even after this 37% drop in August, The Trade Desk still trades at a P/S ratio of 10, which is significantly above the S&P 500 index average of 3.2.

This is a company with an extremely high gross margin -- 80% or so over the last 12 months -- but one that has failed to see significant expansion of its bottom-line net income margin even though it has now reached a large scale. A P/S ratio of 10 is not cheap unless you believe that The Trade Desk will grow quickly or have sky-high bottom-line margins.

It has neither. For this reason, the stock is probably one you should not buy the dip on right now.

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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms and The Trade Desk. The Motley Fool has a disclosure policy.