What happened to digital ad stocks?
These were once a group of the market’s highest flyers, as a mass exodus of advertising dollars from traditional channels to digital channels caused digital advertiser’s revenues, profits and stock prices to shoot higher.
But, someone hit pause on that rally. Mostly due to macro privacy and regulation concerns, coupled with signs of social media fatigue, digital ad stocks have struggled recently. In fact, many of them are in correction territory (10% or more off recent highs).
The sell-off, though, appears to be due exclusively to bad optics. The fundamentals for digital ad stocks remain strong. Engagement continues to move to digital channels, and because ad dollars follow engagement, ad dollars continue to flow into digital channels, too. This trend isn’t stopping. Research firm eMarketer projects digital ad penetration rates globally to go from under 40% in 2017 to nearly 55% by 2022, and for the entire digital ad market to grow at a 13%-plus clip during that stretch.
Because the fundamentals are good, I think near-term bad optics are creating a long-term buying opportunity in digital ad stocks. With that in mind, here’s a list of 15 stocks to consider buying for long term gains.
Digital Ad Stocks to Buy: Facebook (FB)
Widely viewed as the face of the digital advertising industry, Facebook (NASDAQ:FB) soared from a $38 IPO price in 2012 to a near-$220 price tag in July 2018 thanks to the mainstream emergence of digital advertising. But now that the entire digital advertising industry is under pressure from regulators and maxed out usage, Facebook stock has fallen all the way to $160.
Make no mistake about it. This is a dip investors should buy.
In the big picture, there are six apps in the world with 1 billion or more users. Facebook owns four of them. Thus, regardless of where digital ad dollars go, a large portion of them will get allocated to the Facebook ecosystem. From this perspective, all Facebook stock needs to head higher is for ad dollars to continued to shift en masse to the digital channel. That seems like an inevitable consequence of higher digital engagement.
Therefore, in the big picture, Facebook remains the leader of a big-growth digital ad industry. Long-term, this leadership position will power Facebook stock back to $200 and higher.
Digital Ad Stocks to Buy: Twitter (TWTR)
Although less successful at monetizing its users, Twitter (NYSE:TWTR) finds itself in the same boat as Facebook. Both companies are experiencing slowing user growth, and regulation and privacy risks have investors concerned about go-forward growth prospects.
But, like they are with Facebook, the market is overreacting with Twitter.
Twitter only has one app, and that one app has less than 350 million users. So, this isn’t a Facebook ecosystem with broad exposure and wide reach. But, Twitter does dominate its niche of the social media sphere, providing real-time news, updates, and reactions to 300 million actively engaged users who, despite broader privacy concerns, refuse to quit the platform.
Twitter’s ARPU is well below Facebook’s, and margins are also well below industry standard, so this company has a tremendous opportunity to hugely scale both sales and profits over the next several years. In that scenario, Twitter stock could head materially higher from a depressed $30 base.
Digital Ad Stocks to Buy: Snap (SNAP)
Often considered the ugly duckling of the social media world, Snap (NYSE:SNAP) has had a tough time on Wall Street ever since going public. User growth has essentially ground to a halt, while losses aren’t narrowing in any meaningful way. The combination of slow growth and still big losses has even the most bullish investors concerned about where this company (and stock) will go next.
But, alongside Instagram, Snap is the dominant social media platform among the all-important teen demographic.
Being that popular among that important of a demographic will eventually pay off for Snap. Brands that don’t need wide reach but want deep engagement within the teen demographic will likely allocate large portions of their ad budgets to Snap. This dynamic will play itself out multiple times over the next several years, and will eventually result in improved financial stability.
Under $10, SNAP stock looks like a bargain if you believe that this company can deeply monetize its 200 million committed users. I think that will happen, and as such, believe SNAP stock has upside from here.
Digital Ad Stocks to Buy: Alphabet (GOOG)
Although Facebook is often thought of as the king of digital advertising, the biggest player in this space is actually Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). There isn’t much competition. In the U.S., Google controls more than 40% of the total digital ad market, while the nearest competitor is Facebook with ~20% share.
Naturally, then, as the digital advertising industry has been plagued by recent headwinds, GOOG stock has dropped. This used to be a near $1,300 stock. Now, it trades under $1,200.
There are two reasons to buy GOOG stock on this dip. One, the digital ad industry is healthy, and Google’s digital ad business is especially healthy because the platform is built into the fabric of the internet. Two, the company is expanding beyond digital ads, and areas like cloud, autonomous driving and smart homes provide healthy growth drivers outside of advertising.
Thus, there is no reason GOOG stock should be in sell-off mode right now. The overall narrative is quite good, and inevitably, Alphabet stock will bounce back from here.
Digital Ad Stocks to Buy: Microsoft (MSFT)
Although digital advertising isn’t the first (or second or third) thing you think of when you hear Microsoft (NASDAQ:MSFT), this technology giant is actually the biggest digital advertiser in the U.S. outside of Facebook and Google — though they are tied with Oath.
The whole growth narrative at MSFT stock right now is all about the cloud. The company continues to make impressive gains in the public cloud market, and is gradually gaining share on market leader Amazon. Robust cloud growth is driving higher revenue growth, stronger margins and bigger profits. Those three tailwinds are pushing MSFT stock higher.
But, a solid sideshow to this core cloud business is Microsoft’s digital advertising business. A big part of that business is LinkedIn, the professional networking platform which saw revenue growth of nearly 40% last quarter. This business should continue to grow at a nice rate because of its dominance in a niche of the social web. Also, Microsoft owns various other digital ad properties, like Bing search, a platform that reported nearly 20% revenue growth, ex traffic acquisition costs, last quarter.
Put it all together, and Microsoft has quite a large digital advertising footprint. This is just icing on the cake when it comes the entire Microsoft narrative, which is dominated by the cloud right now. Thus, there are plenty of reasons to own MSFT stock here and now.
Digital Ad Stocks to Buy: Match (MTCH)
Although people may not be using social media as much anymore, they are certainly using social dating sites as much as ever. Insert Match (NASDAQ:MTCH), the parent company of multiple digital dating platforms, including the red-hot Tinder.
MTCH stock has been a big winner over the past several years, mostly thanks to robust growth at Tinder. Tinder’s international expansion has been very impressive, and new perks like Tinder Gold and Top Picks keep users paying up for top-quality service. The end result is that Match is growing revenues and profits at a robust pace, which is powering the stock higher.
Long-term, this is sustainable so long as competition doesn’t kill the growth narrative. Facebook is reportedly working on a dating feature, and even if that doesn’t work, the company will likely roll out a dating feature on Instagram, too. Thus, Match’s competitive risks are quite large. Nonetheless, Tinder is the name-brand in this space, and as such, the current upward trajectory in MTCH stock will likely persist for the foreseeable future.
Digital Ad Stocks to Buy: The Trade Desk (TTD)
Although many digital ad stock shave suffered in 2018, one digital ad stock that hasn’t is The Trade Desk (NASDAQ:TTD). Year-to-date, TTD stock is up more than 200%. And, if current trends persist, this run is far from over.
The company, which provides programmatic advertising solutions for advertisers of all shapes and sizes, has found itself at the center of multiple tailwinds recently. Namely, programmatic advertising is the future. With more than 170mm active websites and 380 sites created by the minute, online advertising will continue to grow. As advertisers pour massive amounts of money into multiple different advertising channels, they are increasingly using data and algorithms to optimize spend. As this transition plays out, Trade Desk will become a bigger and bigger part of the global advertising model.
The global advertising market is $700 billion in size, and moving towards $1 trillion over the next decade. Trade Desk’s gross ad spend in 2017 was well under $2 billion. From this perspective, this is a company with small share in a rapidly growing market.
That is a recipe for long-term success. As such, Trade Desk can grow gross ad spend to $10 billion, $20 billion or even $30 billion over the next decade, and still only control a fraction of the advertising market. That means that even conservative assumptions regarding market share imply huge growth prospects for this digital ad stock going forward.
Digital Ad Stocks to Buy: Baidu (BIDU)
When it comes to digital advertising, the megatrend isn’t secluded to just the United States. Instead, this trend is actually especially powerful in China, where digital ad spending accounts for 60% of total paid media spend. Thus, as the digital advertising industry globally has been plagued by headwinds, China digital ad stocks have been hit, too.
One of the China digital ad stocks that has been hit the hardest is Baidu (NASDAQ:BIDU). Baidu is essentially China’s Google. Although the secular growth narrative surrounding this stock remains positive, the market seems to think that a China economic slowdown will curtail digital ad spend, which will inevitably weigh on Baidu’s numbers and BIDU stock.
This could happen, but it’s already priced into BIDU stock, which is 25% off recent highs. Thus, risk-reward on this stock seems quite favorable here. Either the China economy does slow, and BIDU stock barely drops because it has already sold off, or the economy doesn’t slow, and BIDU stock bounces back in a big way.
Digital Ad Stocks to Buy: Tencent (TCEHY)
Another Chinese digital ad stock that has been killed recently amid rising trade war tensions and a strong dollar is Tencent (OTCMKTS:TCEHY). Many consider Tencent the Facebook of China. That is because Tencent is behind WeChat/Weixin, which is China’s only social media app with over 1 billion active users.
But, Tencent is also much more than just the Facebook of China. The company is also behind China’s leading video streaming platform (think YouTube), leading music streaming platform (think Spotify (NYSE:SPOT)), leading mobile payment service (think Paypal (NASDAQ:PYPL)) and leading online games platform. Beyond that, Tencent also has burgeoning cloud and AI businesses.
Because of this broad-based exposure to the Chinese consumer, Tencent stock really is just a pure play on the continued boom in China consumerism. Considering per capita spending in China is 15% as big as per capita spending in the U.S., the most likely path forward for China consumerism is upward and outward. TCEHY stock should follow that trajectory in the long term once near-term headwinds ease.
Digital Ad Stocks to Buy: Alibaba (BABA)
The biggest digital ad player in China is actually Alibaba (NYSE:BABA). Alibaba is known as the Amazon of China for its massive e-commerce and cloud businesses. But, Alibaba is actually ahead of Amazon when it comes to digital advertising. In China’s digital advertising market, Alibaba is the biggest player by far.
BABA stock is getting killed right now for a plethora of reasons. Sentiment across the whole Chinese tech scene is dour due to trade war tensions, slowing economic growth and a strong U.S. dollar weighing on valuations. BABA stock has been particularly weak, though, because its founder Jack Ma is planning on stepping down as chairman next year. Although a succession plan is in place, Ma leaving the company isn’t exactly the vote of confidence investors needed in this uncertain time.
That being said, this is all just bad optics. The China consumerism boom remains alive and well. Alibaba’s revenues grew by 60% last quarter. The company is also aggressively expanding into new markets and geographies, the sum of which make the prospects of 20%-plus revenue growth in a long-term window look very reasonable.
As such, Alibaba remains a big growth stock. Right now, it is trading at a big discount, but that won’t last for long. Thus, buyers here should be rewarded in a multi-year window.
Digital Ad Stocks to Buy: Amazon (AMZN)
There are many reasons to buy and hold Amazon (NASDAQ:AMZN) stock for the long run. The biggest two are: 1) Amazon is the leading retailer in a secular growth e-commerce industry, and 2) Amazon is the leading cloud services provider in a secular growth cloud data-center market.
But hidden behind those two headline reasons is a third reason to buy and hold AMZN stock: digital advertising ramp. Amazon is one of the most visited websites in the world and has one of the most downloaded apps in the world. Yet, relative to its highly trafficked peers, Amazon’s digital ad business is next to nothing.
That is about to change. Amazon’s digital ad business is already an $8 billion annualized business and rapidly growing. The company is slowly eating into the Facebook-Google digital advertising dominance, and has the consumer database to turn that duopoly into a triumvirate.
As such, add “digital advertising” to the long list of reasons to buy AMZN stock.
Digital Ad Stocks to Buy: Yelp (YELP)
Aggregate restaurant rating platform Yelp (NASDAQ:YELP) is one of the digital advertising industry’s best comeback stories in 2018. For years, this company was written off as overvalued, as advertising revenue and user growth slipped amid intense competition. YELP stock dropped from near $100 highs in 2014 to the mid-$30’s earlier this year.
Then, YELP stock took off from the mid-$30’s to upper-$40’s overnight after a stellar earnings report. Revenue growth was great. Advertiser growth was strong. Profit margins were healthy. From top to bottom, everything looked good.
If Yelp can keep this momentum and continue to take share of ad dollars moving online, then YELP stock could grind higher over the next several quarters and years thanks to secular digital advertising tailwinds.
Having said that, of all the stocks on this list, YELP is my least favorite. I’m not so sure there is room for Yelp in the crowded social web, and there is still the risk that Amazon, Facebook or Google eats their lunch.
Because of that, I’m not terribly bullish on YELP stock here and now. But, if this company can simply maintain its user base and attract more advertisers, then YELP stock could indeed head higher.
Digital Ad Stocks to Buy: Verizon (VZ)
When it comes to discussing digital ad stocks, telecom giant Verizon (NYSE:VZ) doesn’t come up very often. But make no mistake: Verizon is actually one of America’s largest digital advertising players.
The core of Verizon is its wireless coverage business. Then in 2015, Verizon expanded the scope of its operations by acquiring AOL, and in 2017, Verizon expanded even further and acquired Yahoo. Now, Verizon has rolled those two businesses together and operates them under one parent company called Oath.
Oath is pretty big. Revenues last quarter were around $2 billion, so about $8 billion annualized. Oath also has big growth potential, when you consider that Verizon is America’s largest provider of wireless coverage. That means they have access to infinite amounts of data regarding millions of consumers. Verizon can easily use that data to create attractive advertising solutions through Oath.
All together, Verizon stock isn’t a big winner here and now. But, it is stable with a big dividend and relatively cheap valuation. Also, there are growth catalysts on the horizon with 5G and Oath. Thus, this stock is a good risk-adverse addition to any portfolio.
Digital Ad Stocks to Buy: Roku (ROKU)
When shares of streaming device maker Roku (NASDAQ:ROKU) first started trading on Wall Street and the stock was soaring, a lot of bears were worried that Roku would follow in the footsteps of other niche consumer hardware companies that were IPO unicorns, like GoPro (NASDAQ:GPRO) and Fitbit (NYSE:FIT).
That didn’t happen. And, it didn’t happen because Roku built out a robust software business. A big part of that software business is Roku Channel, which is Roku’s ad-supported streaming service. As such, in the big picture, a huge part of Roku’s long-term growth narrative is its ability to win over digital video ad dollars.
So far, Roku has proven successful in this campaign. Early results seem to indicate that as engagement goes from cable to streaming, ad dollars will follow suit, and Roku will be first in line to take those ad dollars.
This is a big transition that is still in its early stages. Consequently, Roku’s big growth rates are here to stay for a lot longer. Those big growth rates should power this stock meaningfully higher in a long-term window.
Digital Ad Stocks to Buy: Netflix (NFLX)
This last one is more of a “what if” scenario, but when discussing the digital ad industry, we shouldn’t forget about streaming giant Netflix (NASDAQ:NFLX).
Netflix currently makes a large majority of its money from subscriptions, but as the Netflix user base grows, the company has a unique opportunity to expand revenue streams. Namely, the company could start a free, ad-supported version of Netflix that wouldn’t have all the content of the paid Netflix, but could act as a teaser to draw in new customers. That would boost user growth and add an additional advertising revenue stream.
Also, the company could pioneer a new way of advertising through paid product promotions in its originals. If the Netflix user base gets large enough, this product promotion advertising model could gain some real traction.
Overall, Netflix has multiple digital advertising levers that it can pull at any second to boost revenue growth. Because of this, Netflix stock has big growth potential.
As of this writing, Luke Lango was long FB, TWTR, SNAP, GOOG, TTD, BIDU, PYPL, BABA, and AMZN.