The Trade Desk Stock: Why I'd Wait for a Better Entry Point Before Buying

Key Points

• The Trade Desk's revenue growth rate has been slowing.

• Big-tech rivals with aggressive ambitions in advertising could challenge The Trade Desk stock's premium valuation.

• Strong cash generation and product momentum remain, but there's not enough margin of safety in the stock price.

• 10 stocks we like better than The Trade Desk ›

The Trade Desk (NASDAQ: TTD) has been punished this summer, following its latest quarterly update. This adds to an already challenging year for the stock, putting shares down a total of 56% year to date as of this writing.

Shares fell hard, even though the company's second-quarter revenue and earnings grew nicely. That disconnect between a growing business and a plummeting stock price can tempt investors to buy the dip. Look closer, however, and a wait-and-see approach is probably best. The advertising technology company faces tough comparisons in the second half of the year as U.S. political advertising rolls off. At the same time, heavyweight competitors are investing aggressively. Add in a still-premium valuation, and I'd prefer a better entry point.

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Recent results were solid -- with important context

In The Trade Desk's second quarter, revenue rose 19% to $694 million (down from a growth rate of 25% in the first quarter). Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) was about $271 million (39% margin), and free cash flow was $117 million. But management did say that, excluding last year's U.S. election benefit, top-line growth would have been "around 20%," underscoring healthy underlying demand.

But things get shakier in the back half of the year when it comes to comparisons. The company's Q2 earnings call, for instance, noted an even larger expected effect from political comps in the third quarter. Guidance calls for at least $717 million of Q3 revenue (14% year over year), and management noted that, excluding the benefit of U.S. political ad spend in Q3 2024, implied growth would be around 18%. That gap quantifies how last year's election activity pads the base period and will weigh on reported growth.

This challenging context should persist into the fourth quarter. During Q4 2024, revenue grew 22% to $741 million. Management flagged that political spending was strong in the quarter, just as it was strong in Q3. This is a reminder, therefore, that The Trade Desk's upcoming year-over-year growth rates will lap a meaningful tailwind in the second half of the year.

Looking ahead: Real catalysts -- and real risks

Of course, The Trade Desk has a lot going for it. Connected TV (CTV) remains the company's fastest-growing channel, and its Kokai ad-buying platform and AI features are driving better campaign performance and higher client adoption. Management says that roughly three-quarters of client spend is already running through Kokai, with plans for full adoption by year-end. That should help the company take share on the open internet, even as brand budgets ebb and flow.

Getting more specific about brand budgets, The Trade Desk CEO Jeff Green highlighted some risks to spending in the company's Q2 earnings call.

"From a macro standpoint, some of the world's largest brands are absolutely facing pressure and some amount of uncertainty," Green explained.

He continued: "Some have to respond more than others to tariffs. Many are managing inflation worries and the related pricing that comes with that."

Another risk is deep-pocketed competition. Tech giants Alphabet and Amazon continue to push hard into advertising, with double-digit ad growth and massive, ongoing investment in data, infrastructure, and advertising inventory. That scale advantage can pressure pricing and make it harder for independent platforms to sustain a premium multiple over time.

Why I'd wait

The Trade Desk has enviable assets: Strong cash generation, leadership in CTV, and increasing adoption of its AI-driven tools. Still, I prefer to buy great businesses when valuations are attractive in the context of both their opportunities and challenges. With Q3 guidance tempered by tough political comps, Q4 comparisons set to be difficult as well, competitive intensity rising, and a premium valuation for the growth stock, patience looks prudent.

A better setup would be a period when the market resets expectations and the stock trades closer to a mid- to high-30s price-to-earnings ratio. This, of course, isn't a forecast for where The Trade Desk's valuation multiple is headed. It's just the kind of valuation that has historically offered a cleaner margin of safety for high-quality growth companies.

In short, terrific company, tricky timing.

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Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, and The Trade Desk. The Motley Fool has a disclosure policy.