Cathie Wood Is Selling The Trade Desk. Should You Too?

Cathie Wood has become a popular investment manager to watch, investing in disruptive technology stocks through her firm Ark Invest and the ETFs it sells.

Last week, Ark sold shares in the advertising technology company Sales Office (TTD -0.65%)Should investors follow their lead?

All About The Trade Desk

Trade Desk is a digital platform that connects advertisers and media. It really is that simple, although it uses artificial intelligence (AI) and cutting-edge technology to match brands with media, leading to accuracy and real results for users. It has become a powerful technology company that offers valuable services supported by a huge and growing data load.

The company’s revenue has grown at a staggering compound annual growth rate (CAGR) of 42.6% over the past eight years, including 23% last year. It’s a no-brainer for the advertising industry, and advertisers will continue to need it.

Why did Cathie Wood sell stocks?

There was no real news about The Trade Desk last week, and the stock didn’t make any significant moves. But there are plenty of reasons she could sell.

The stock is up 47% this year already and is approaching its previous 2021 highs. Perhaps she wanted to capitalize on her gains. Perhaps there are other stocks she sees as better opportunities and wants the cash to buy them. In my opinion, The Trade Desk may be too mainstream and not groundbreaking enough for her standards at this point.

But the market disagrees. Consider how Trade Desk stock is performing against the two Cathie Wood ETFs that cover it, the flagship Arka Innovations ETF (ARK -0.15%) AND Ark Next Generation Internet ETF (ARKW -0.32%)and S&P500.

^SPX Data by YCharts

Does Cathie Wood know something investors don’t? Maybe. But if anything, there could be some tailwinds coming soon that will boost business. The Federal Reserve meets this week and has hinted that it will cut interest rates for the first time since 2020.

Cathie Wood hasn’t lost 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 a sense that there are newer, flashier, more disruptive stocks on Ark’s radar.

Is Cathie Wood wrong?

Another thing to look at is The Trade Desk – it’s crazy expensive. The stock trades at a P/E of 210 and a price-to-free-cash-flow ratio of 110. However, the forward P/E is 56. That’s not cheap.

Here’s what that means. The Trade Desk came under significant pressure when inflation took off two years ago. Advertisers immediately cut their spending, and The Trade Desk posted its first quarterly net loss as a public company.

TTD Quarterly Net Income Data by YCharts

In such cases, there is typically a decline in the value of the stock, which is exactly what happened to the market in early 2022. However, The Trade Desk stock quickly rebounded, and earnings quickly returned to positive and rising profits.

Last year, the company reported earnings per share (EPS) of $0.36 as the company recovers, but analysts expect $1.61 this year. That’s a huge jump. The high valuation means that investors are also confident about The Trade Desk’s profitability prospects, even though the company still has two more quarters to report this year. This also explains why the P/E ratio is drastically lower. Analysts expect the company to maintain that level and are targeting $1.90 in EPS in 2025.

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

It’s unclear why Cathie Wood is selling her shares, but if you’re a long-term investor looking for a solid stock, you should definitely consider buying The Trade Desk stock.

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