Many Tech Stocks Need a Pep Talk

The shares of some of the best publicly listed tech companies are getting demolished … and it makes no sense. These companies are growing fast, and their management teams are top-notch.

A clear example is what’s happening with The Trade Desk, Inc. (Nasdaq: TTD). Managers reported solid earnings on Monday and announced a 10-for-1 stock split payable June 17. Shares dropped 25% as the growth premium once afforded to Trade Desk shares evaporated in real time.

Investors should realize these types of occurrences are nothing too worrisome and are actually great buying opportunities. What happened to Trade Desk shares is not unique. Many of the fastest-growing, can’t miss public companies are getting blown up following what looks like good corporate news.

Related Post: How the Trade Desk Has Pioneered the New Era of TV Ads

Executives at Twilio Inc. (NYSE: TWLO) and ServiceNow, Inc. (NYSE: NOW), important cloud platforms, reported solid financial results last week. Managers were optimistic about the future. Corporate performances during the first quarter were exceptional. Sales at Twilio and ServiceNow surged 62% and 30%, respectively … but both stocks dropped following the reports.

It appears that traders are no longer willing to pay a premium for growth.

To be sure, some of this is based on the idea that growth is now readily available. The global economy is reopening. Revenues and earnings from restaurant chains, hotels and airlines should look great compared to a year ago when most of the hospitality sector was shuttered.

The commodity sectors are especially booming, too. Everything from corn and soybeans to lumber and oil is flirting with multiyear highs. This will mean fatter profits for the companies that plow fields, cut forests and poke holes in the Earth’s crust.

While all of that growth is great for the overall economy, there isn’t anything wrong with tech.

This is especially true for the companies with dominant and digitally transformational platforms like Twilio, ServiceNow and Trade Desk.

The problem in the short term is that investors can get growth elsewhere. So, they are rotating out of tech.

It’s a mistake.

I like cyclical stocks, and they have been performing well lately. However, cyclical companies are not as dynamic as tech, and they will not grow as quickly longer term.

More importantly, both tech and cyclicals can and should go up at the same time as the economy improves. It is not a zero-sum sort of thing.

Even with the huge drop in share prices this week, Trade Desk is the dominant digital ad platform in a can’t miss sector. Over time, all ads will be digital and there will be many more commercials. Don’t lose sight of this. It’s important. As all of media moves to digital delivery, so too will the ads that fund development. This will happen because digital ads are measurable, unlike traditional commercials.

Yes, there will be some privacy challenges going forward, yet the digital transformation of the advertising complex is happening. Ad buyers, content creators and even consumers are all on board.

Related Post: Pandemic Pushes Digital Transformation

Plus, share price volatility is common for Trade Desk stakeholders. The stock lost 35% in the last four months of 2018 before nearly tripling during the following 10 months. In February 2020, shares tumbled from $318 to $136 in March. By December, the stock rallied to $959. History shows these declines are short-lived.

While the overall trend for tech is the same due to the digital transformation, savvy investors should consider using recent weakness to buy Trade Desk shares.

 

The business is solid, and the outlook for digital ads is very bright.

Investors need to remember that the digital transformation is an investment story that is still in its early stages.

Best wishes,

Jon D. Markman

About the Editor

Jon D. Markman is winner of the prestigious Gerald Loeb Award for outstanding financial journalism and the Society of Professional Journalists' Sigma Delta Chi award. He was also on Los Angeles Times staffs that won Pulitzer Prizes for coverage of the 1992 L.A. riots and the 1994 Northridge earthquake. He invented Microsoft’s StockScouter, the world’s first online app for analyzing and picking stocks.

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