In late 2018, it looked like digital ad stocks were on the verge of absolute disaster.
It all started with rampant data privacy and security issues that stung some of the industry’s titans. Then, those titans started to report numbers in 2018 that were worrisome. User growth broadly slowed, a result of fake account vetting and broader social media fatigue. Revenue growth slowed, too. Margins dropped because digital ad companies were spending an arm and a leg to doubly secure user data. Profit growth fell flat across the whole industry.
What a difference a few months makes.
In 2019, all those concerns have moved into the rear-view mirror, and digital ad stocks have roared higher. Data privacy headwinds have turned out to be temporary. Slowing user growth has been largely offset by rising engagement growth. Revenue growth has come roaring back. Margins are starting to improve after a temporary setback. Profit growth is expected to re-accelerate higher.
Because of these broad improvements across the whole industry, tech stocks — digital ad stocks in particular — look good for the rest of 2019. With that in mind, let’s take a look at seven tech stocks that deserve your attention today.
The biggest concern over at Alphabet is margins. Revenue growth has been steady at a 20%-plus rate for several consecutive years. Given the company’s wide and irreplaceable reach across Google search, YouTube and various other digital properties, this 20%-plus revenue growth rate will likely persist for the foreseeable future (self-driving and cloud revenue should help, too). But, margins have been in free-fall as there has been a huge migration to mobile ads, which Google wasn’t optimized for. As such, click-through-rates were lower, and margins were hit hard.
But, margins have shown signs of stabilizing for a few quarters now, and it appears that the worst of this margin headwind is behind the company. If so, revenues and margins should rise concurrently in 2019. That should produce some of the biggest profit growth rates Alphabet has seen in several quarters. Ultimately, that will help GOOG stock rally to new highs.
The second-largest digital ad company in the world, Facebook (NASDAQ:FB), was hit hard in 2018 amid numerous headwinds. But, those headwinds have passed in 2019, and Facebook stock has since roared higher.
This rally will continue for the rest of 2019. Broadly speaking, there are three things at play here. One, Facebook is pushing forward on a new growth vertical through e-commerce, and this revenue diversification will be well-received by investors, boost sentiment and give analysts room to move long-term estimates higher. Two, Facebook is finally figuring out how to optimally monetize Stories ads, and this will cause revenue growth rates to move higher in 2019, which will also boost investor sentiment and push long-term estimates higher. Three, Facebook’s spend rates will moderate against very easy laps, creating an opportunity for huge profit growth.
Overall, then, the story of Facebook in 2019 will be defined by renewed revenue growth, expanding margins and robust profit growth. That tri-fecta of favorable attributes will keep FB stock on a solid uptrend for all of 2019, especially considering that the stock remains cheap relative to other high-growth, high-margin peers.
Once considered the ugly duckling in the digital ad world, Twitter (NYSE:TWTR) has rapidly changed its growth narrative over the past several years through renewed digital ad growth, and this narrative flip has sparked a surge in TWTR stock.
To be sure, even the recovery hasn’t been a smooth ride for Twitter. Twitter stock was adversely impacted in 2018 by negative user growth trends. Specifically, the company’s monthly active user base started consistently shrinking. Investors didn’t like that trend. Twitter has since eradicated the metric in favor of daily active users. Investors weren’t too fond of that move, either.
But, monthly active user base shrinkage doesn’t really matter here. Instead, what matters is continued robust revenue growth, healthy engagement growth, and steady margin expansion. The market is starting to realize this. As Twitter continues to report all three of those things throughout 2019, Twitter stock will bounce back.
All digital ad stocks have rebounded in 2019. But, none have bounced back quite like Snap (NYSE:SNAP), which has gone from zero in 2018, to hero in 2019, on its way to a 100%-plus year-to-date gain.
The catalyst behind the big move higher in the stock? User base stabilization. The late 2018 plunge in Snap stock was the result of the user base declining in back to back quarters. That trend ended last quarter. The user base didn’t grow. But, it didn’t shrink either. Investors were encouraged that this, coupled with continued robust revenue growth and margin expansion, was a sign that the worst was over for Snap.
But, that may not be true. Instagram appears to still be eating Snap’s launch, and the rapid rise of Tik Tok has almost surely had a negative impact on Snap usage. Thus, next quarter’s numbers may not support the big year-to-date rally in Snap stock. If so, then this stock could be due for a major selloff.
In the group of publicly traded tech stocks, the new kid on the block is Pinterest (NYSE:PINS), but this newness doesn’t preclude the stock from being one of the industry’s more attractive investments.
Pinterest went public in mid-April, and the IPO was a big success. With good reason. The fundamentals here are very good. You have a company that has a bigger U.S. user base than Twitter, and a rapidly growing international user base that is on track to be bigger than Twitter, too. Yet, Twitter has a $27 billion market cap. Pinterest has a $12 billion market cap.
To be sure, the discrepancy is because Twitter currently monetizes its users at a higher rate than Pinterest, and converts those revenues to profits at a higher operating margin. But, Pinterest just started monetizing recently, and it’s only a matter of time before its ARPU rates hit Twitter levels. It’s also only a matter of time before margins get to or above Twitter levels, too, considering the company has near 70% gross margins.
All in all, then, Pinterest appears dramatically undervalued here and now given its favorable fundamentals. The market won’t let this undervaluation persist forever. As such, the opening day success of the Pinterest IPO should reasonably flow into 2019 full-year success.
Arguably the hottest player in the digital ad world right now is a company that isn’t traditionally known for digital advertising — Amazon (NASDAQ:AMZN).
The story here is simple. Thanks to being one of the world’s largest e-commerce platforms, Amazon is also one of the most-visited websites in the world. Peer highly visited websites are supported by huge digital ad businesses. Amazon isn’t. But, there’s no reason they can’t be, given the company’s huge digital traffic volume and wealth of consumer purchasing data. Consequently, Amazon is rapidly transforming into an exceptionally relevant digital ad player.
This transformation is a big positive for Amazon stock. Not only does it help reinvigorate overall revenue growth rates, which are being dragged down by slowing e-commerce growth, but it also provides a huge boost to profits since digital ad margins are significantly higher than e-commerce margins. Broadly, then, Amazon’s push into digital ads should create a huge profit surge in 2019. That surge should push Amazon stock meaningfully higher this year.
Flying under the radar in the digital ad world is traditional retailer Walmart (NYSE:WMT).
Right now, Walmart doesn’t really have a digital ad presence. But, that’s about to change. The company just bought ad tech firm Polymorph Labs, shortly after the WSJ ran a piece saying that Walmart is chasing Amazon for ad dollars. In sum, these actions basically say that Walmart is following in the footsteps of Amazon, and leveraging its giant e-commerce reach to build a scalable digital ad business.
The implications are likewise favorable for Walmart. The company will get a revenue boost from new digital ad revenue, and a margin and profit boost, too. Ultimately, those boosts will lead to WMT stock staying on a winning path.
As of this writing, Luke Lango was long GOOG, FB, TWTR, PINS, AMZN and WMT.