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The Trade Desk (NASDAQ: TTD) has been among the most consistent tech growth stocks over the past few years, and 2023 is no exception. The stock is up over 60% this year but has pulled back 20% from its highs thanks to the recent market sell-off.

With a quick decline in stock price, investors might be wondering if this is a buying opportunity or if this is just a realignment of expectations. Let’s look at The Trade Desk’s most recent results to find out.

The Trade Desk is leading an advertising revolution

The Trade Desk is a leader in buy-side (sometimes called demand-side) advertising. This side of advertising is for clients who want to place ads in front of the consumer. While Alphabet‘s Google ads and Meta Platforms‘ Facebook and Instagram ads are handled in-house, The Trade Desk is a significant player in nearly every other corner of the internet. Through The Trade Desk’s analytics platform, it automatically bids on different locations throughout the internet (whether it’s connected TV, podcasts, mobile, or online video) where it thinks the ads will have the greatest effect.

Targeting the consumer creates a better ad experience for the viewer while ensuring advertising budgets are being utilized on the right demographics.

This type of advertising has become incredibly popular, although it has led to some privacy concerns regarding user data. That’s where The Trade Desk’s Unified ID 2.0 (UID2) comes in. This tracking cookie upgrade converts email addresses to anonymous IDs, allowing your advertising profile to stay alongside you regardless of what device you’re using. It’s also open-source code, so anyone can investigate it to see what information is being tracked.

The future of targeted advertising is bright, so why did The Trade Desk’s stock decline so much over the past few weeks?

The CEO pay package is hurting earnings significantly

While the investment thesis behind The Trade Desk is positive, its results don’t warrant its valuation. In the second quarter, The Trade Desk’s revenue grew a respectable 23% year over year. However, when a stock is valued at more than 25 times sales, it has to grow faster than that to remain at a buying level. As a result, the stock tumbled 5% the day after earnings, but it doesn’t mean it was a lousy report either.

Earnings per share (EPS) rose from a $0.04 loss in 2022 to a $0.07 profit in 2023. However, this would have been higher if The Trade Desk didn’t provide such a generous pay package to its CEO. Since the beginning of 2022, The Trade Desk has provided its CEO with a long-term performance stock grant of $370 million. That’s a massive pay package and would land CEO Jeff Green on the list of highest-paid executives if it wasn’t all in stock options (which may not be worth anything if the stock doesn’t reach certain levels).

Adding back the $48 million that was paid to Green in Q2 would increase The Trade Desk’s net income from $33 million to $81 million — a 145% increase. So while The Trade Desk is still growing strongly, the CEO compensation package severely holds back the company’s potential.

But with all of that in mind, is The Trade Desk stock a good one to buy on the dip? I’d say maybe. Even with the pullback, the stock still trades at a nose-bleed valuation.

TTD PS Ratio data by YCharts

If The Trade Desk grows its revenue at a 25% compound annual rate for the next three years and regains its peak profit margin of 29%, it will be valued at 36 times earnings. While that’s still an expensive price tag, it’s reasonable for a software company. The kicker here is that the stock price cannot increase from now until then. I’m usually OK with a valuation if it indicates a reasonable multiple in two to three years, as I’m planning on holding the stock for much longer than that.

With the massive market opportunity of programmatic advertising, I think The Trade Desk has a bright future. While the valuation and CEO compensation package is concerning, I think they are distractions for a company that is securing a vital market. As a result, investors can nibble at the stock in small quantities, but if the valuation drops to a mid-teens level, they should be pouncing on the opportunity to load up on The Trade Desk stock.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Keithen Drury has positions in Alphabet and The Trade Desk. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, and The Trade Desk. The Motley Fool has a disclosure policy.

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