Investing Opportunities: Navigating Recent Stock Price Dips

While making investment decisions, I usually don’t wait for stock prices to dip. However, a recent market sell-off presents a chance to add to existing holdings, as long as my initial investment rationale remains sound.

With the recent decline, many favored stocks have experienced significant price drops. Despite this, it’s important to note that most of these companies are not in crisis. Many were once priced for perfection and have not met the high expectations set by analysts, yet they remain fundamentally strong.

Spotlight on Two Growth Stocks to Buy the Dip

In this analysis, I will discuss two companies that exemplify this situation and why they are promising candidates for further investment.

1. The Trade Desk

The Trade Desk (NASDAQ: TTD) operates a data-driven digital advertising platform tailored for brands and publishers alike.

What sets The Trade Desk apart is its independent operation on the buy-side, compared to the more insular approaches of companies like Alphabet, Meta Platforms, and Amazon. This structure allows The Trade Desk to provide a level of transparency that its larger competitors cannot match, as they tend to hoard valuable data.

Since going public a decade ago, The Trade Desk has generated impressive results, yielding an 18-fold return despite a 61% decline from its peak this past year. Typically, significant market sell-offs impact weaker companies or those losing market share. However, The Trade Desk’s recent drop is attributable to not meeting elevated market expectations for its valuation.

Over the past ten years, The Trade Desk has traded at an average of 82 times free cash flow (FCF), nearly triple the S&P 500 average during the same period. Its first missed guidance in 33 quarters triggered a swift response from the market.

Nonetheless, The Trade Desk managed to grow sales by 26% in 2024 and is projecting a 17% increase for the first quarter of 2025. While this indicates a slowdown, it still significantly outpaces the broader ad industry’s anticipated growth. With only about 1% market share in a soon-to-be $1 trillion advertising sector, the company’s long-term growth potential remains promising. The recent partnership with Spotify further positions The Trade Desk to expand its reach in the connected-TV and audio advertising markets. Trading at 43 times FCF, a valuation rare since 2016, I see continued investment in The Trade Desk as a strategic move as it increases market share.

2. SPS Commerce

SPS Commerce (NASDAQ: SPSC) provides cloud-based solutions that unify retailers, suppliers, and logistics providers, effectively transforming the global retail supply chain.

Investors may need to trust the potential of a complex player like SPS Commerce, but its performance clearly supports its value. Since 2016, the company has achieved a 20-fold increase in stock value while its revenue has risen 17-fold. SPS Commerce was named one of America’s Best Companies by Forbes in 2024, underpinning its robust business model.

Despite impressive growth, SPS Commerce’s shares have also fallen 35% from their highs due to guidance that didn’t meet the market’s expectations. Currently, it trades at an average price-to-FCF (P/FCF) ratio of around 63, a premium that reflects historical valuation metrics since 2010.

The company posted a 21% revenue increase in Q1 and is reiterating a 20% growth target for 2025, signaling that the recent sell-off may not accurately reflect its potential. SPS Commerce has consistently pursued growth through acquisitions, enhancing its product offerings and geographic footprint, exemplified by its purchase of firms like Carbon6 and TIE Kinetix.

With an 18% return on invested capital (ROIC), SPS Commerce has shown it can deliver strong cash flows compared to the resources used for acquisitions. The company has achieved sales growth for 97 consecutive quarters, with 94% of its revenue being recurring. Given the trend of retailers moving toward complex omnichannel operations, SPS Commerce offers a compelling investment opportunity.

Currently valued at 38 times FCF, it is trading at its lowest level since the 2020 market crash, representing a potential opportunity to invest in a premium business at a more accessible price.

Conclusion

Current market conditions have created opportunities to invest in companies with strong fundamentals despite temporary setbacks. Both The Trade Desk and SPS Commerce exemplify the kind of resilience that could lead to substantial returns going forward.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Nasdaq, Inc.