Cathie Wood is selling The Trade Desk. What about you?

Cathie Wood has become a popular investment manager to watch. She invests in disruptive technology stocks through her firm, Ark Invest, and the exchange-traded funds (ETFs) she sells.

Last week, Ark sold shares of the adtech company The commercial office (NASDAQ:TTD)Should investors follow suit?

All about The Trade Desk

The Trade Desk is a digital platform that connects advertisers and media. It’s that simple, even though it uses artificial intelligence (AI) and cutting-edge technology to connect brands and media, resulting in pinpoint accuracy and real results for users. It has become a leading technology company that offers valuable services backed by a huge and growing data load.

The company’s revenue has grown at a staggering 42.6% compound annual growth rate (CAGR) over the past eight years, including 23% last year. It’s a must-have service for the advertising industry, and advertisers will continue to need it.

Why was Cathie Wood selling stocks?

There was no particular news regarding The Trade Desk last week, and the stock didn’t see any notable moves. But there are plenty of reasons why it could have sold.

The stock is up 47% this year already and is approaching its previous highs from 2021. It may have wanted to ride out its gains. It may see other stocks as better deals and want the cash to buy them instead. My hunch is that otherwise, The Trade Desk may be too mainstream at this point and not disruptive enough to meet its criteria.

However, the market disagrees with her. Consider how Trade Desk stock has performed relative to the two ETFs that represent it, the flagship Cathie Wood Ark Innovation Exchange Traded Fund (NYSE: ARKK) And Ark Next Generation Internet ETF (NYSE: ARKW)and the S&P 500.

^SPX data by YCharts

Does Cathie Wood know something investors don’t? She might. But there could be tailwinds coming very soon that will boost economic activity. The Federal Reserve is meeting this week and has hinted that it will cut interest rates for the first time since 2020.

Cathie Wood hasn’t lost all faith in the company. Ark Innovation still owns 945,864 shares and Ark Next Gen Internet owns 266,875 shares. So I think there’s a combination of factors here, led by the sense that there are newer, flashier, more disruptive stocks on Ark’s radar.

Is Cathie Wood wrong?

Another thing to note about The Trade Desk: It’s an extremely expensive company. The stock is trading at a price-to-earnings ratio of 210 and a price-to-free cash flow ratio of 110. However, its forward price-to-earnings ratio is 56. That’s not cheap.

Here’s what that means. The Trade Desk came under considerable pressure when inflation took off two years ago. Advertisers immediately cut back on spending, and The Trade Desk reported a quarterly net loss for the first time as a publicly traded company.

TTD Net Income (Quarterly) data by YCharts

What usually happens in a case like this is that the stock crashes, and that’s what happened to the market in early 2022. But The Trade Desk stock rebounded quickly, quickly returning to positive and growing earnings.

Last year, the group reported earnings per share (EPS) of $0.36, which helped its recovery, but analysts are expecting EPS of $1.61 this year. That’s a huge jump. The high valuation means investors are also confident in The Trade Desk’s profitability prospects, even though it still has two quarters to report results this year. This also explains why the forward price-to-earnings ratio is significantly lower. Analysts expect the company to maintain this level and are targeting EPS of $1.90 in 2025.

The Trade Desk’s business is closely tied to the broader economy, and as the Fed prepares to cut interest rates, it stands to benefit significantly. It’s chasing a $900 billion market that’s growing, and it owns only a fraction of it right now.

There’s no way to know for sure why Cathie Wood is selling, but if you’re a long-term investor looking for a solid stock, definitely consider buying The Trade Desk.

Should You Invest $1,000 in The Trade Desk Right Now?

Before you buy shares of The Trade Desk, consider the following:

THE Motley Fool, Securities Advisor The team of analysts has just identified what they believe to be the 10 best stocks Investors need to buy now…and The Trade Desk wasn’t one of them. The 10 stocks we picked could deliver monstrous returns in the years to come.

Consider when Nvidia I made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $729,857!*

Securities Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building advice, regular analyst updates and two new stock picks each month. Securities Advisor the service has more than quadrupled the return of the S&P 500 since 2002*.

See all 10 actions »

*Stock Advisor returns as of September 16, 2024

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