Home Discount rate Why the Trade Desk fell 12.2% in September

Why the Trade Desk fell 12.2% in September

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What happened

Actions of the The commercial counter (NASDAQ: TTD) fell 12.2% in September, according to data from S&P Global Market Intelligence. There wasn’t a lot of company-specific news in September as the Trade Desk reported strong earnings while upping its forecast in August.

Therefore, September’s sell-off was likely due to macroeconomic fears about rising interest rates, which tend to hurt expensive, high-growth stocks like this.

Image source: Getty Images.

So what

Much of the fall in the Trade Desk came towards the end of the month after Federal Reserve officials issued a policy statement on September 22. In the statement, officials said the Fed will start cutting its treasury bond purchases as early as November and may raise interest rates sooner than expected – potentially next year.

You might be wondering, what does The Trade Desk have to do with the business? The short answer is not a lot. After all, the Trade Desk has no debt, so higher interest rates would actually benefit the finances of the company due to the increased interest income on its cash holdings.

Plus, a faster-than-expected reduction means the economy is recovering faster. This should be good for ad revenue, this is where The Trade Desk makes its money.

However, the company is also a high multiple growth stock, much of its value of which is tied to future earnings, not today’s earnings. The intrinsic value of any stock, or any financial asset for that matter, is the sum of all future earnings discounted to the present.

Discount rates are usually estimated from the risk-free rate, so higher interest rates could cause investors to discount future earnings more. This means that future earnings are worth less in today’s dollars, the further away they are. This is why The Trade Desk was sold, along with many other low-profit and no-profit stocks.

Now what

When a high-quality stock is sold for reasons unrelated to its business, this is usually a time for long-term investors to think about starting or building a position.

While The Trade Desk isn’t a cheap stock, it is showing strong financial results, and only 21% of the global advertising market is currently done on a programmatic basis. As the # 1 demand-side programmatic ad buying platform, it looks like The Trade Desk has many years of profitable growth ahead of it.

Given the market turmoil in September and so far in October, it is impossible to tell if the Trade Desk has bottomed, as the stock is still well above its 52 week lows. Yet, as long-term investors, we know that it’s generally best not to wait for a crash if a high-quality company stock can be bought at reasonable prices.

Investors who don’t have a position in The Trade Desk may want to take a long look at the stock today after its September slump.

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Billy Duberstein owns shares of The Trade Desk. Its clients may own shares of the companies mentioned. The Motley Fool owns shares and recommends The Trade Desk. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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