The Trade Desk Is Now the Worst-Performing S&P 500 Stock This Year. Is it a Buying Opportunity or a Red Flag?

Key Points

• The Trade Desk has seen a surprising deceleration in growth this year.

• Competition and a maturing CTV market seemed to be weighing on growth.

• Its valuation has gotten more attractive, though it's unclear when a recovery might come.

• 10 stocks we like better than The Trade Desk ›

For years, The Trade Desk (NASDAQ: TTD) was a stock market darling, marching steadily higher as it delivered solid growth year in, year out. The company established itself as the leading independent demand-side platform (DSP) in the rapidly emerging ad tech industry, and capitalized on new platforms like Connected TV and retail media.

However, this year, The Trade Desk has run into some unforeseen challenges. Growth suddenly slowed as the company appears to be facing new challenges from "walled gardens," the tech giants like Alphabet, Meta Platforms, and Amazon that operate their own ad ecosystems that can block The Trade Desk. After Netflix and Amazon announced that they had formed a partnership allowing advertisers to purchase Netflix ads through Amazon DSP, The Trade Desk plunged double-digits on Wednesday, becoming the worst-performing stock on the S&P 500 this year, trading down 61% year-to-date as of Sept. 11.

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The stock also plunged following the release of two out of its three earnings reports this year (see chart below).

Data by YCharts.

Let's review the challenges facing The Trade Desk before discussing whether or not the stock is a buy.

Image source: Getty Images.

What's ailing The Trade Desk?

When The Trade Desk plunged in February, it was the first time in its publicly traded history that the company had missed its guidance.

CEO Jeff Green admitted that on the earnings call, and explained it wasn't due to competition or new technology, or any significant change like that. The Trade Desk just had a few internal errors, or what Green called "a series of small execution missteps." However, he attempted to reassure investors, saying, "We see a larger and faster-growing market than we originally expected."

The company's first-quarter earnings report in May reassured investors as revenue growth accelerated again, but the stock then plunged again as the company posted its slowest quarter of growth in its history (just 19%), with the exception of the beginning of the pandemic.

For the third quarter, it called for revenue growth to slow to at least 14%, though it would be 18% adjusting for the decline in political ad spend. This time around, Green cited headwinds from tariffs on some of its biggest customers and downplayed the threat from Amazon, which has made more investments in its DSP.

The stock received several analyst downgrades on the report as its growth is decelerating even as digitial advertising growth is strong at industry leaders like Meta Platforms, key verticals like Connected TV (CTV) are maturing, and increasing competition from alternatives like Amazon.

Is The Trade Desk a buy?

Following the earnings report, Walmart ended its exclusivity deal with The Trade Desk for advertisers using its shopper data, according to The Information, and it was later hit by the news of the Amazon-Netflix partnership, allowing Netflix ad inventory to be purchased through Amazon's DSP.

Despite Green's efforts to reassure investors, there's not much reason to be positive about The Trade Desk right now. Its growth rate seems to have fallen below 20% for good, and its underperformance relative to the rest of the digital advertising market is notable.

It's not fully clear what's pressuring the company, though competition appears to be a factor, as does the dominance of walled gardens, which are continuing to perform well.

The Trade Desk has become more attractive on a valuation basis as the stock has fallen, trading at a price-to-earnings ratio of just 26 based on adjusted earnings per share.

However, The Trade Desk stock could head lower if its growth continues to decelerate. The company has a long history of delivering results, and it should eventually be able to recoup some of its recent losses, but patience seems like the best approach at this point for would-be buyers.

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