Investors in The Trade Desk (TTD -2.15%) were seeing red on Thursday as the stock plunged, but they were also green with envy.

As shares of The Trade Desk tumbled more than 30%, fellow adtech titan AppLovin (APP 8.15%) was soaring on its earnings report, jumping more than 20% on its fourth-quarter results as it smashed estimates once again.

For The Trade Desk shareholders, it was clearly a disappointing turn of events, and seeing AppLovin's shares soar only added insult to injury, as AppLovin has surpassed The Trade Desk as the largest adtech company by market cap.

A disappointing fourth quarter

The fourth quarter was a rare miss for The Trade Desk. Revenue rose 22% to $741 million, which was well below the consensus at $759.6 million, and it also missed management's own guidance.

The Trade Desk CEO Jeff Green was direct about the disappointing results. On the earnings call, he said, "I want to acknowledge up front that for the first time in 33 quarters as a public company, we fell short of our own expectations." Green said he didn't care about missing Wall Street estimates, but he viewed missing the company's own guidance as a breach of trust with investors.

In the third quarter, management had called for revenue of at least $756 million in the fourth quarter and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $363 million.

The Trade Desk also missed that target with $350 million in adjusted EBITDA. Its adjusted earnings per share increased from $0.41 to $0.59, which edged out the Wall Street consensus at $0.57.

Image source: Getty Images.

Internal errors or new competition?

Companies miss estimates for a number of reasons. Typically, poor execution, weak customer demand, macroeconomic headwinds, or a competitive shift are some of the biggest factors in earnings shortfalls.

Green laid the blame for the disappointing results squarely on weak execution, adding, "This didn't happen because the opportunity isn't as big as we thought. In this case, it isn't because of our competition, either." Instead, he cited a "series of small execution missteps, while simultaneously preparing for the future."

Among those missteps was that Kokai, its new artificial intelligence (AI)-based platform for customers, rolled out slower than expected, though management expects to upgrade 100% of its customers from Solimar to Kokai this year. It also had its biggest-ever reorganization in December, and that may have slowed the business down. Finally, it made some deliberate decisions to focus on long-term opportunity rather than short-term revenue.

Is AppLovin a threat?

Green didn't discuss any competitive threats on the call, and The Trade Desk and other DSPs typically don't factor into the company's calculus, as it tends to focus instead on the dominant ad platforms like Alphabet's Google, Meta Platforms, Amazon, and Apple, which he refers to as walled gardens that he believes will eventually open up to platforms like The Trade Desk.

The Trade Desk had long been the biggest independent DSP on the market, but AppLovin has now taken that crown. AppLovin reported 75% growth in advertising revenue to $3.22 billion for 2024, ahead of The Trade Desk's $2.44 billion in revenue on 26% growth.

AppLovin and The Trade Desk aren't close competitors. AppLovin has historically focused on mobile gaming apps and helping developers monetize apps. The Trade Desk, on the other hand, targets big brands and agencies, implementing and optimizing ad campaigns across multiple channels.

As AppLovin has grown, however, it's focused on new markets to fuel its expansion. It's expanded to direct-to-consumer (DTC) brands and aims to add more businesses in the digital economy this year. In 2025, it plans to launch a self-service AI dashboard, similar to what The Trade Desk offers, and it aims to "explore" Connected TV (CTV) advertising this year as well. That's significant, as video, including CTV, now represents nearly 50% of The Trade Desk's business, and the company sees CTV as a major growth opportunity.

The Trade Desk's next biggest market is mobile -- AppLovin's base -- which accounts for a mid-30% percentage of ad spend on The Trade Desk's platform.

What it means for The Trade Desk

If Green is correct, his company's shortfall may owe more to its errors than an outside factor like competition from AppLovin, but AppLovin's plans for 2025 and its blowout growth indicate that the two adtech platforms are on a collision course.

Businesses often use more than one DSP, so the two companies can both grow by grabbing market share elsewhere and benefiting from a growing pie. But ultimately, they're fighting for a piece of the same pie, though the advertising market is massive.

Given its stellar track record and Green's sterling reputation, the company's reasoning for missing guidance deserves to be taken at face value, and one quarter of results isn't enough evidence to conclude that something fundamental has changed with The Trade Desk.

The company deserves at least another quarter to get things right, but another guidance miss would crush the stock and indicate that it could be competition that is sapping the company's growth, rather than internal missteps.

Keep an eye on The Trade Desk's customer retention numbers as well. The company has reported customer retention of more than 95% every quarter for the past 11 years. If that were to change, that would be a big red flag.

For now, I plan to hold my shares of The Trade Desk, and I think there's a good opportunity for a recovery, especially with the stock trading at a price-to-earnings ratio of just 50 based on adjusted earnings per share. Keep in mind that 22% is still an excellent revenue growth rate. The Trade Desk just got punished because it missed its guidance. Guidance misses are usually a signal to the market that the stock was already overvalued, and that expectations need to be reset based on updated earnings and guidance from management. 

However, with AppLovin surging, there is the risk now that the competitive landscape could be more complex than Green is admitting, and investors shouldn't ignore that. We should get a clear answer sometime this year.