With Inflation Easing, What’s The Outlook For Digital Ad Stocks?

Our theme of Ad Tech Stocks – which includes Internet platforms and ad technology players – has declined by 58% year-to-date, as the U.S. and the global economy face multiple headwinds, underperforming the Nasdaq-100, which remains down by roughly 31% over the same period.  While the broader tech sector has been hit with rising rates, high inflation and a slowing economy have also forced marketers to revisit their advertising budgets, impacting the revenue growth rates for ad-tech players, and ending the big revenue surge that most players saw through the pandemic. Over Q3, Alphabet, the leading digital ad vendor, saw sales grow by a mere 6%, while Pinterest’s sales rose by 8%. Facebook parent Meta Platforms actually saw sales decline for the second straight quarter.

While the sell-off has been quite long and painful, we think that the theme might be worth a look at this point. Inflation has shown some signs of abating in the U.S.  Inflation has eased a bit, with the November number coming in at 7.11%, compared to 7.75% in October and 8.2% in September. Mortgage rates have also eased a bit recently, falling from 7.1% in early November to 6.3% as of last week. Although 7% inflation is still very high relative to historical levels, this is nevertheless a good sign for advertising players as lower input costs could free up budgets for advertising. Moreover, digital ads should continue to be a preferred mode of advertising in a tough environment, given that they offer targeting capabilities, translating into potentially better and more measurable outcomes. Valuations in the sector are also looking quite attractive, in our view. For example, Meta Platforms trades at just 14.5x consensus 2023 earnings, while Alphabet trades at just about 17x 2023 consensus earnings.

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[1] Month-to-date and year-to-date as of 12/16/2022
[2] Cumulative total returns since the end of 2016