Why The Trade Stock Was Tumbling Today

Key Points

• Advertisers on Netflix can now use Amazon's DSP, dealing a blow to The Trade Desk.

• Investors were already concerned about The Trade Desk's slowing growth before today's news.

• Morgan Stanley also downgraded the adtech stock.

• 10 stocks we like better than The Trade Desk ›

On a day when artificial intelligence (AI) stocks were broadly moving higher, The Trade Desk (NASDAQ: TTD) was down double digits. The leading adtech company got dinged by news that Netflix had integrated with Amazon's DSP. A downgrade from Morgan Stanley was also weighing on the stock.

As of 3:09 p.m. ET, the stock was down 12.1% on the news.

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The Trade Desk's troubles continue

The Trade Desk has been the worst-performing stock in the S&P 500 this year as growth has slowed in the face of competition from Amazon and other platforms, so the news that Amazon and Netflix are teaming up only exacerbated existing concerns.

The partnership will allow advertisers using Amazon's DSP to get direct access to Netflix's ad inventory in several major markets around the world. The partnership will begin in the fourth quarter.

The deal has implications for The Trade Desk because it will make Amazon's DSP more attractive for advertisers, especially as Netflix's ad tier is rapidly growing. It also strengthens the so-called "walled gardens" that The Trade Desk is competing with, referring to complete ad ecosystems that big companies like Alphabet and Meta Platforms use. The alliance between Netflix and Amazon essentially represents two walled gardens teaming up.

Additionally, Morgan Stanley lowered its rating to equal weight from overweight and slashed its price target on the stock from $80 to $50. The investment bank said it was wrong about the durability of The Trade Desk's growth and noted "mounting headwinds" this year.

Can The Trade Desk recover?

For years, The Trade Desk could do little wrong, and the stock marched higher as the adtech company delivered outstanding results quarter over quarter. However, The Trade Desk stock has tumbled in two of its last three earnings reports now as its growth is slowing, and management's efforts to reassure investors have fallen flat.

Amazon may now be the company's biggest rival in connected TV as it signed a deal with Roku earlier this year, and its DSP now works with every major streaming service.

Whether that leads to advertisers dropping the service remains to be seen, but it does seem to limit its growth opportunity. The Trade Desk is already integrated with Netflix, but the deal is still likely to put pressure on it.

The Trade Desk's valuation has proven to be a vulnerability during the sell-off this year, and while the price is certainly more reasonable after this year's sell-off, the company will have to prove that its growth rate won't continue to compress.

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Jeremy Bowman has positions in Amazon, Meta Platforms, Netflix, Roku, and The Trade Desk. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, Netflix, Roku, and The Trade Desk. The Motley Fool has a disclosure policy.