Be very cautious about the NDX newcomer!!!

Last week, $Trade Desk Inc.(TTD)$ was urgently added to $NASDAQ 100(NDX)$ , replacing the approved acquisition of $Activision Blizzard(ATVI)$ . Although $Microsoft(MSFT)$ and ATVU did not finalize the acquisition immediately (originally planned for July 18), the major obstacle to this acquisition was the U.S. regulatory approval. Once approved, the acquisition is expected to proceed without hindrance.

As a result, ATVI's stock price has come very close to the acquisition price, justifying its removal from the index. The announcement was made after the market closed on July 12, with the execution on July 17.

Looking at the market trends, there was a gap-up on July 13, followed by a significant influx of funds on July 17, driving the price higher.

Trade Desk Inc. (TTD), a tech-driven company that keeps up with the pace, is among the best performers in the second-tier growth stocks. Its main focus is on CTV advertising, similar to $Roku Inc(ROKU)$ .

Over the past few years, it has benefited from the ongoing shift from traditional to digital advertising, experiencing a period of explosive growth as a programmatic advertising company. However, it also experienced a correction following the growth stock downturn in the second half of 2021.

Nevertheless, the company strengthened its performance by introducing innovative products like UID2 and Kokai, establishing a higher market position than Roku. The company's digital channel advertising, including CTV (Connected TV), video, audio, etc., is currently engaged with various companies, such as $Walt Disney(DIS)$ $Wal-Mart(WMT)$ , and TikTok. Due to its broader business scope and significant advantage during the pandemic era, its performance is slightly better than Roku, which solely focuses on streaming media.

Despite the impressive growth and not-so-low valuation, it does not imply that TTD's valuation is not high.

In Q1, the company's revenue reached $383 million, a 21% YoY increase, mainly driven by the momentum of CTV. Profitability improved due to reduced expenses, with G&A expenses decreasing from 40% to 34%, resulting in a turnaround from a net loss of $14.6 million in the previous year to a net profit of $9.3 million, accounting for 2.4% of total revenue.

Diluted earnings per share stood at $0.02, and the balance sheet is robust, with $1.3 billion in cash and only $254 million in debt, providing ample financial flexibility.

However, the forward EBITDA multiple of 47 times is far higher than its media peers, as the industry's average EBITDA multiple is only 6.3 times.

The current forward P/E ratio is 63.6 times, also significantly higher than its peers.

Even if we consider the consensus expectations for 2025, it still implies a 29 times EBITDA multiple. Therefore, although TTD's recovery is optimistic, the high valuation makes the company more sensitive to market conditions, especially regarding macroeconomic factors like interest rates and inflation.

Be cautious about the "special rebalancing" after being added to the Nasdaq 100 Index suddenly.

While investors might experience short-term euphoria, don't forget that the market capitalization on July 14 will influence the "special rebalancing" weight in the Nasdaq.

On July 14, ATVI's market cap was $70.8 billion, while TTD's market cap was $43 billion, making ATVI 65% larger.

Since the Nasdaq 100 Index is market-cap-weighted, the market cap will determine the weight in this special rebalancing, meaning its weight might be reduced by 40% in just two weeks!

If TTD is not a meme stock or a leading stock at the forefront of the trend, it is unlikely to be further boosted by institutional investors and speculative traders.