Cathie Wood is selling the trading office. Should I?

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

Last week, Ark sold shares of the adtech company Trade office (TTD -0.65%). Should investors follow suit?

All about The Trade Desk

Trade Desk is a digital platform that connects advertisers and media outlets. It really is as simple as that, though it uses artificial intelligence (AI) and cutting-edge technology to match brands with media, resulting in pinpoint accuracy and real results for users. It has become a powerful technology company that provides 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. This is a seamless service for the advertising industry, and advertisers will continue to need it.

Why did Cathie Wood sell shares?

There was no particular news on The Trade Desk last week and the stock made no notable moves. But there are many reasons why it could have sold.

The stock is already up 47% this year and is nearing its previous highs of 2021. Perhaps he wanted to take his gains. There may be other stocks that he sees as better deals and wants the money to buy instead. My guess is that other than that, The Trade Desk might be too popular at the moment and not disruptive enough to live up to its standards.

However, the market does not agree with it. Consider the performance of Trade Desk shares compared to the two Cathie Wood ETFs that feature it, the flagship Ark Innovation ETF (ARKK -0.15%) and Ark Next Generation Internet ETF (ARKW -0.32%)and S&P 500.

^ SPX data by YCharts

Does Cathie Wood know something investors don’t? It could be. But in any case, there could be tailwinds very soon that will boost business. The Federal Reserve meets this week and has broadly suggested 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, driven by the feeling that there are newer, brighter, more disruptive stocks on Ark’s radar.

Does Cathie Wood get it wrong?

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

Here’s what it means. The trade office came under considerable pressure when inflation struck two years ago. Advertisers immediately cut spending, and The Trade Desk reported its first quarterly net loss as a public company.

TTD Net Income (Quarterly) data by YCharts

What typically happens in a case like this is that stocks rally, and that’s what happened to the market in early 2022. But The Trade Desk’s stock rebounded quickly as it quickly returned to positive and rising earnings.

It reported earnings per share (EPS) of $0.36 last year as it recovered, but analysts expect $1.61 this year. It’s a huge leap. The high rating implies that investors are also confident in The Trade Desk’s profitability prospects, even though it still has two quarters to report this year. It also explains why the forward P/E ratio is drastically lower. Analysts expect the company to hold this and are shooting for $1.90 in 2025 EPS.

The Bureau of Commerce business has been closely tied to the broader economy, and as the Fed prepares to cut interest rates, it should benefit significantly. There’s a $900 billion market opportunity coming up that’s only growing, and it’s only a fraction of that 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.