Digital ad stocks have been whacked amid the coronavirus pandemic — and with good reason.
The global economy has come to a screeching halt. Consumers aren’t going outside, let alone spending on discretionary items. Companies have consequently cut their ad budgets in a big way.
There’s no sugarcoating it. Things are going to get ugly in the digital advertising world. You could very realistically see digital advertising revenues drop 30% or more in the second quarter of 2020. It will likely be the ugliest quarter ever for digital advertisers.
And yet, I think now is the time to buy digital ad stocks.
The rationale is pretty simple. Advertising isn’t going away forever. Once the economy normalizes and rebounds — which should happen in the second half of 2020, assuming the coronavirus pandemic largely fades by summer — consumers will get back to spending, and companies will get back to advertising.
Ad dollars always follow engagement. Digital platforms are currently seeing record high engagement. So, when ad spending trends rebound in the second half of 2020, digital platforms have a reasonably good chance to turn record high engagement into record high sales.
Long story short, while second-quarter 2020 numbers will be awful in the digital advertising world, second-half 2020 numbers could be quite good. Most digital ad stocks are down about 50% from recent highs. They are priced for bad Q2 numbers. But they are not priced for good second-half numbers.
As such, from a risk-reward prospective over the next 6 months, digital ad stocks look really good.
With that in mind, here’s a list of seven digital ad stocks to buy for a second-half rebound:
- Facebook (NASDAQ:FB)
- Alphabet (NASDAQ:GOOG)
- Snap (NYSE:SNAP)
- Pinterest (NYSE:PINS)
- The Trade Desk (NASDAQ:TTD)
- Roku (NASDAQ:ROKU)
- Amazon (NASDAQ:AMZN)
Digital Ad Stocks to Buy: Facebook (FB)
Of all the potential digital ad stocks to buy for a rebound, the strongest is Facebook … for a few reasons.
First, Facebook has a huge balance sheet with over $50 billion in cash, giving the company ample resources to weather the coronavirus storm without any insolvency or liquidity concerns.
Second, as one of the two largest digital advertisers with arguably the most proven ad platform, Facebook will likely increase its share of ad dollars during the pandemic, as companies cut back advertising on less proven channels and double-down ad efforts on more proven channels.
Third, the company still owns four apps, each with over a billion users, and only two of which are fully monetized. The company’s long-term growth potential through increased ad inventory and share expansion in the digital ad market remains robust.
Fourth, FB stock is dirt cheap, at just 18 times forward earnings for what projects as 20%-plus revenue and profit growth over the next several years.
Net net, Facebook stock is unequivocally one of the best digital ad stocks to buy here and now.
Alphabet (GOOG, GOOGL)
Right next to Facebook, one of the other strongest digital ad stocks to buy for a second-half rebound is Alphabet. Again, this is for a few (very similar) reasons.
First, Alphabet has arguably the strongest balance sheet in technology, with nearly $120 billion in cash and very little debt. This strong balance sheet will allow the company to weather the coronavirus storm better than pretty much every other digital advertiser.
Second, Alphabet is also the largest player in the digital advertising world. Consequently, as companies shift ad spending to bigger platforms amid the pandemic, this shift will inevitably provide a boost for Alphabet’s advertising platforms.
Third, Alphabet’s biggest non-advertising business — Google Cloud — should perform strongly in 2020, on the back of increased demand for infrastructure cloud services as companies increasingly migrate processes, workflows and data into online channels.
Fourth, GOOG stock is attractively valued, at just 21 times forward earnings for what projects as double-digit revenue and profit growth over the next several years (and potentially way more, depending on how Waymo pans out).
Overall, then, Alphabet is a well-fortified, long-term winner. It has favorable competitive positioning, robust growth prospects and a relatively cheap valuation. That’s a recipe for success for GOOG stock.
One of the digital ad stocks to buy for a second-half rebound with the most potential upside is Snap.
Snap stock has been destroyed amid the coronavirus pandemic. Shares have dropped from $19 in early February, to just over $12 today, on concerns that as a smaller and newer player in the digital ad market, the company will be disproportionately impacted by coronavirus-related ad budget cuts.
This is true. Snap’s second-quarter revenue numbers could be very, very ugly.
But, Snap recently reported that its platform saw record-high engagement in March. That record-high engagement will only go higher in April as consumers remain in quarantine. Such increases in engagement only increase Snap’s choke-hold on young consumers.
An increased choke-hold on that demographic implies that, once discretionary spending and advertising trends rebound in the second half of 2020, Snap could be an out-sized winner of those ad dollars.
Big picture — while second-quarter numbers could be awful, second-half numbers could be great.
At $12, SNAP stock is priced fully for the former — and not at all for the latter. My modeling suggests that a strong second-half rebound could propel SNAP stock back toward $20 by the end of the year, implying nearly 100% upside from current levels.
Much like Snap, Pinterest is another smaller digital ad stock with potentially huge upside in the back half of 2020.
Pinterest is smaller and newer than Snap. So, while Snap stock has plunged on concerns that its ad platform will be disproportionately impacted by coronavirus-related ad budget cuts, Pinterest stock has plunged by even more on similar concerns.
In early February, this stock was up above $25. Today, shares are close to $15.
Zooming out, this huge selloff implies huge potential upside over the next six to twelve months.
Pinterest’s ad platform is new. But it’s far from bad. If anything, it’s quite good. Pinterest’s users are high-intent users. They aren’t aimlessly scrolling through a Pinterest feed. Instead, they are looking for something to do. This intent-driven audience makes Pinterest’s users more likely to engage with and act on an advertisement — and through various innovations, Pinterest is improving its ad platform’s targeting and reach abilities so that brands can optimally capitalize on the platform’s unique, intent-driven users.
In other words, Pinterest is building a special, strong and differentiated digital ad platform. Sure, the company will report bad second-quarter numbers. But, the underlying strengths of this new-style ad platform will power a huge second-half rebound once ad spending trends rebound.
As that happens, Pinterest stock could explode higher. My modeling suggests that PINS stock could finish the year around $20.
The Trade Desk (TTD)
For long-term investors, one of the best digital ad stocks to buy on the current dip is The Trade Desk.
For those who are unaware, The Trade Desk is a demand-side platform (DSP) which is a leader in programmatic advertising. In simple terms, that means that the company provides a platform to advertisers which allows them to leverage machines and smart algorithms to automatically and dynamically buy ads, based on ad measurement data.
Long story short, programmatic advertising is smarter, faster, cheaper and better than traditional advertising. In the future, essentially all ads will be transacted programmatically. Today, however, The Trade Desk’s gross ad spending measures just 1% of total global digital ad spending.
Thus, the long-term opportunity here for The Trade Desk to increase its share of global digital ad spending is tremendous.
Nothing about the coronavirus pandemic damages this long-term growth narrative. If anything, the coronavirus pandemic could accelerate this long-term growth narrative. One of The Trade Desk’s major growth verticals is connected TV advertising, and connected TV advertising could actually accelerate in the aftermath of the pandemic.
The Trade Desk is a long-term winner, going through a near-term rough patch. The rough patch will pass. When it does, the secular growth trends underpinning this company will resume.
There are five big reasons to like shares of streaming device maker Roku on the dip.
First, as stated numerous times before, the base case for the coronavirus pandemic is for it to taper off over the next few months, and for the economy and ad spending trends to normalize in the back half of the year.
Second, Roku is presumably seeing record-high engagement in the second quarter of 2020, with consumers across the globe cooped up inside and glued to TV screens. Because ad dollars follow engagement, this record-high engagement lays the groundwork for Roku to report record-high sales in the back half of 2020 once ad spending trends normalize.
Third, one of the long-term implications of the coronavirus pandemic could be an acceleration in the linear to connected TV shift. Bored consumers across the globe are presumably increasing their consumption of streaming TV content amid the pandemic. Roku is a pure play on this shift. Any acceleration of it will create long-term tailwinds for Roku.
Fourth, Roku is still a $10 billion company disrupting a $140 billion linear TV advertising market. In other words, long-term growth prospects remain robust. They will only get better if connected TV advertising trends gain momentum thanks to the pandemic.
Fifth, ROKU stock has tumbled more than 40% over the past few weeks. Shares now trade at their most attractive valuation in several quarters. My modeling suggests that, assuming growth normalization in the third and fourth quarters, ROKU stock could hit $120 by the end of the year.
Last, but not least, on this list of digital ad stocks to buy for a second-half rebound is Amazon.
Amazon is relatively new to the digital ad game. But, the company has already made a splash, controlling an estimated 4% of the market in 2019. That’s because Amazon already has a huge user base with Amazon.com, and a ton of shopping data on all those users. Wide reach plus tons of data equals a successful ad business.
This burgeoning ad business could actually be boosted long term because of the pandemic, thanks to increased e-commerce adoption and more robust traffic through Amazon.com.
Meanwhile, Amazon’s cloud business should also be boosted long term because of the pandemic, as demand for cloud infrastructure services increases amid an accelerated physical-to-digital enterprise shift.
Big picture — Amazon’s e-commerce, ad and cloud businesses may be hurt in the near term by the pandemic. But, all three are actually long-term beneficiaries of the coronavirus outbreak.
That means AMZN stock is a classic case of near-term pain, long-term gain. The near-term pain will last for the next months. The long-term gain will start in the summer.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long FB, SNAP, PINS, TTD and ROKU.