Yahoo Finance Is The Trade Desk Inc (NASDAQ:TTD) A Sell At Its Current PE Ratio?
I am writing today to help inform people who are new to the stock market and want to begin learning the link between The Trade Desk Inc (NASDAQ:TTD)’s fundamentals and stock market performance.
The Trade Desk Inc (NASDAQ:TTD) trades with a trailing P/E of 68.5x, which is higher than the industry average of 32.4x. While TTD might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. Check out our latest analysis for Trade Desk
Breaking down the Price-Earnings ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for TTD
Price-Earnings Ratio = Price per share ÷ Earnings per share
TTD Price-Earnings Ratio = $92.06 ÷ $1.344 = 68.5x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as TTD, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. TTD’s P/E of 68.5x is higher than its industry peers (32.4x), which implies that each dollar of TTD’s earnings is being overvalued by investors. Therefore, according to this analysis, TTD is an over-priced stock.
A few caveats
Before you jump to the conclusion that TTD should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to TTD, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with TTD, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing TTD to are fairly valued by the market. If this is violated, TTD’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to TTD. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for TTD’s future growth? Take a look at our free research report of analyst consensus for TTD’s outlook.
Financial Health: Is TTD’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
