The Trade Desk Inc. provides a self-service omni-channel software platform enabling clients to purchase and manage data-driven digital advertising campaigns. TTD stock is trading on NASDAQ since September 2016. In less than three years, the shares have surged from the IPO price of $28.75 to over $232 earlier this month.
Early investors have managed to multiply their money by 8 for a total return of 700%. There are money managers out there who would trade their right arm for such gains. Unfortunately, two problems arise.
First and foremost, no trend lasts forever. Extrapolating the past into the future is a dangerous game for stock market investors to play. Second, you cannot profit from yesterday’s growth, so you should not let it seduce you. Imagining what life would be if only you had managed to catch those returns is a waste of time.
Instead, traders and investors must focus on the decisions they make in the present. Is TTD stock a good choice right now or not? Based on traditional fundamental metrics the stock has been obscenely overvalued ever since the IPO, but kept rising anyway. That is why a different approach is needed.
The chart above allows us to take a look at TTD stock’s uptrend through the prism of the Elliott Wave principle. It reveals that a five-wave impulse pattern has been forming since September 2016. Wave 1 looks like a leading diagonal, followed by a simple a-b-c zigzag in wave 2.
The five sub-waves of wave 3 lifted the stock as high as $161.50 in September 2018. Wave 4 is another a-b-c zigzag which erased over 35% of the company’s market cap in just three months. Which brings us to the last four months which have been nothing short of spectacular.
TTD Stock is Running on Hope
TTD stock surged from $102 in late-December to $232 by May 3rd. A return of nearly 130% in less than five months brought The Trade Desk’s trailing P/E ratio to 120. This means investors today are paying upfront for the company’s earnings in the next 120 years.
Of course, the company’s profits can and probably will increase in the years ahead, thus reducing the P/E ratio. However, the current valuation suggests the stock’s main engine right now is hope, not the underlying business. Valuation doesn’t matter until it does. And the Elliott Wave analysis above indicates it may start to matter soon.
According to the theory, a three-wave correction in the opposite direction follows every impulse. If the count above is correct, a major bearish reversal in TTD stock can soon be expected. To make matters worse, corrections often persist until they have erased almost all of wave 5’s gains.
In terms of price, this means the anticipated three-wave retracement can drag the shares back down to the support of wave 4 near $100 – $110 a share, implying a ~50% decline from current levels.
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