The Trade Desk Subject to Stock Market Direction

After climbing back above $80 per share, what’s next for Trade Desk stock (TTD)? Shares in the online advertising platform may see a pop after its results for the preceding fiscal quarter are announced before the open on August 9.

With its sky-high forward price-to-sales (P/E) multiple (134.6x), it makes sense when investors point out that its long-term potential is more than priced into shares. It could keep its rich valuation if the stock market overall remains steady. However, a market correction in the next few months could send it considerably lower. (See Trade Desk stock charts on TipRanks)

So far in 2021, an extended sell-off has yet to play out. Yet given the risk factors that could persist going into 2022 (Delta variant of COVID-19, inflation/interest rate worries), the risk of potential volatility is trending higher.

The problem for Trade Desk? Much like other tech names with very high valuations, this stock could fall substantially from today’s prices, and still trade at a forward multiple that’s reflective of its growth prospects.

Prospects More Than Factored into TTD Stock Price

One factor has played a big role in Trade Desk’s recent strong performance. Back in late June, Alphabet’s Google (GOOGL) unit announced a two-year delay in its scrapping of third-party cookies from its Chrome browser.

Obviously, that’s good news, as it postponed a risk that was weighing on TTD stock. Along with this, the launch of its Solimar ad platform has also helped to improve investor sentiment for shares.

This new platform could further TTD’s ability to keep its lead in what’s known as the Open Internet ad market. In other words, the Open Internet is the online ad market outside of Google, Facebook (FB), and other “walled garden” advertising networks.

As mentioned above, if markets remain steady, booming prospects may help Trade Desk continue to move back toward its all-time high ($97.28 per share). Yet if markets start to head lower? This could be one of the names that experiences a heavy amount of multiple compression.

If Market Direction Shifts, Expect This Stock to Sell-Off as Well

Again, so far, the Delta variant and inflation worries have yet to really impact the market’s overall direction. Except for two brief pullbacks in February and May, indices such as the S&P 500 and Nasdaq 100 have continued to trend higher this year.

This may not be the case a few months from now. Whether it comes from the COVID-19 variant situation getting worse, longer than “transitory” inflation leading to interest rate increases sooner than expected, or another overarching factor, the risk of a correction, meltdown, or sell-off is rising.

In turn, possible big declines lie ahead for TTD stock. A change in today’s environment may mean severe multiple compression. Those risks include a “growth at any price” investing philosophy, and near-zero interest rates. That is, a reduction in its forward P/E ratio. How bad? Shares could fall by high double-digits, and still be priced in line with above-average rates of sales and earnings growth.

For example, what happens if Trade Desk goes from trading for 134.6x its projected 2021 earnings, to 75x its projected 2021 earnings. Multiply 62 cents (analyst consensus for earnings per share this year) by 75, and TTD’s valuation falls from $84 per share, down to $46.50 per share. That’s nearly 45% below current prices.

What Analysts are Saying About TTD Stock

According to TipRanks, TTD stock has a consensus rating of Strong Buy. Out of 13 analyst ratings, 10 rate it a Buy, 3 analysts rate it a Hold, and 0 analysts rate it a Sell.

As for price targets, the average The Trading Desk price target today is $81.21 per share, implying around 3.37% in downside from today’s prices. Analyst price targets range from a low of $40 per share, to a high of $100 per share.

Bottom Line: Big Downside Risk for Trade Desk Shares if Markets Pull Back

If markets get through today’s risks, and continue to gradually move higher, Trade Desk stock may be able to do so as well. As it continues to make progress dominating the Open Internet advertising market, it may have a path back to its all-time high.

On the other hand, if markets correct in the months ahead? Expect TTD stock to be one of the names that pulls back considerably, as it fails to sustain an off-the-charts forward earnings multiple.

Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article at the time of publication.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.