The Trade Desk Stock Is Down 50%. Is It a Buy for 2025?

On Feb. 12, The Trade Desk (NASDAQ: TTD) announced its fourth-quarter results, and by some measures, it was another strong report, with revenue up 22% year over year. But the company's revenue of $741 million also fell short of the $758 million analysts expected, and the stock plunged in response. It's currently down 43% from where shares traded ahead of the report, and down 50% from the peak it hit in December.

"While we are proud of these accomplishments, we are disappointed that we fell short of our own expectations in the fourth quarter," CEO Jeff Green said.

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The Trade Desk's long-term growth prospects as a digital ad-buying platform are still intact. The company is well positioned to benefit from growing ad spending on connected TV platforms, which is expected to be a huge opportunity in the coming years. But investors may want to hold off buying shares, as the stock's valuation still looks expensive even after the post-earnings haircut.

Strong growth wasn't enough

For 2024, revenue grew 26% to $2.4 billion, accelerating over the previous year's growth of 23%. Because The Trade Desk generates revenue from fees charged as a percentage of total platform spending and other services, it earns high margins. The strong top-line growth drove an impressive 44% year-over-year increase in adjusted earnings per share in the fourth quarter. For the year, adjusted earnings grew 32% to $1.66 per share.

Revenue missed estimates, but The Trade Desk continued to grow faster than the industry. Digital ad spending grew 13% last year, according to Statista. That puts the company's results in a more positive light.

The Trade Desk is in a strong competitive position. It has one of the best demand-side platforms for programmatic advertising, which makes buying ads more efficient and comprises 90% of digital ad spending. Many of the leading streaming services have adopted the company's Unified ID 2.0 (UID2) technology for more accurately targeting audiences without using third-party cookies, which are being phased out over privacy concerns.

The connected TV ad market is one of the fastest-growing opportunities in digital advertising, and it's one of the strongest revenue drivers for The Trade Desk. GroupM previously estimated the connected TV ad market would grow 20% to reach $38 billion in 2024.

The stock's valuation is pricey

The stock's collapse -- despite its fairly strong Q4 results -- shows why you can't ignore valuation even when it comes to the best growth stocks. Even after that fall, The Trade Desks's price-to-earnings (P/E) multiple of 92 is a steep premium.

The company does generate a lot of free cash flow -- $641 million in 2024 alone. That gives it a more reasonable valuation of 57 times free cash flow.

However, $494 million of that free cash flow comes from adding back in its stock-based compensation expenses, which aren't actually cash generated via normal business operations. While it's reasonable for a small portion of free cash flow to be comprised of stock-based compensation, The Trade Desk's figure is excessive. As a result, the stock is more expensive than its price-to-free-cash-flow multiple indicates.

Investors have grown accustomed to this company exceeding expectations, so when it fell short for the first time in 33 quarters, the stock was naturally going to respond. Management blamed the underperformance on execution missteps as it made several operational changes in the quarter. While The Trade Desk has captured only 1% of its addressable market, the stock's still-high valuation leaves it vulnerable to further potential declines in the near term.

The S&P 500 is trading at 29 times earnings, which is a historically high valuation for the broad market. To minimize the downside risk from owning high-P/E stocks, I would consider other growth stocks trading at earnings multiples closer to the market average before buying shares of The Trade Desk right now.

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John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends The Trade Desk. The Motley Fool has a disclosure policy.