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It was only about a year ago that technology companies warned of a looming digital advertising recession as economic uncertainty lingered. More than a year later, the industry appears in a starkly different position, with commentary and results from some of the largest behemoths pointing to a sector — that’s fallen pressure to weakening spending patterns, a deteriorating macro picture and headwinds from Apple ‘s 2021 iOS privacy changes — on the mend. The signs of stabilization are perhaps most evident through recent better-than-feared earnings from behemoths like Alphabet and Meta Platforms as they focus on cost cuts and efficiency after 2022’s rout. Last month, Google reported more than 3% year-over-year growth in ad revenue, while YouTube ads beat a Wall Street estimate of $7.43 billion, per StreetAccount. Meta Platforms said ad revenue rose about 12% last quarter from the prior year. Total revenue grew by double digits for the first time since 2021. During an earnings call, chief financial officer Susan Li attributed some of that rise in revenue to heightened spending from online retailers and Chinese companies. To be sure, advertising levels stand a long way off the heightened levels seen in the past, but there’s no doubt the industry looks better positioned than it did in 2022, said Rohit Kulkarni, analyst at Roth Capital Partners. GOOGL YTD mountain Alphabet shares year to date “We have seen greater evidence of return to normalcy in a way that was not contemplated earlier this year,” he said. Even with these signs pointing to stabilization, Wall Street cautions investors from putting their money into derivative plays. Instead, they recommend capitalizing on the trend through the major names. “Some of these smaller ones just have a little bit more volatility than we’re comfortable with,” said Deepwater Asset Management’s Gene Munster. “When it comes to Meta, Google — they’re the titans.” Buying the ‘800-pound gorilla’ It’s hard to ignore Alphabet or Meta Platforms when investing in the advertising industry. Combined, both companies account for at least half of the market, according to Insider Intelligence, with Amazon clocking in at a roughly 7% share. Amid this year’s artificial intelligence craze, shares of both Meta and Alphabet have surged 151% and about 47% in 2023, respectively, along with their valuations. As of Friday’s close, the price-to-earnings ratio on a 12-month basis stood at about 20 and 21, respectively. META YTD mountain Meta Platforms shares year to date With these heightened levels, some investors may consider hunting for cheaper alternatives to play the advertising environment — but that move could end in disappointment, cautions Paul Meeks. “I know the temptation would be to go after companies like Pinterest and Snap – cheaper ways to play the same theme – but those companies, when they report, seem to continuously disappoint,” said the portfolio manager at Independent Solutions Wealth Management. With more resources and cash on hand, these companies will only get bigger, and many investors may end up regretting not betting on the “800-pound gorilla,” Meeks said. Morningstar’s Ali Mogharabi points to strong user bases and first-party data access as strengths putting the behemoths ahead of smaller competitors. These valuable assets allow them to analyze consumer behavior, while helping advertisers better target certain groups and enhance return on ad spending. “Eyeballs is what the advertisers are looking at,” he said, favoring Alphabet from a valuation standpoint, and given their AI tailwinds. On the digital side, Hanna Howard, a research analyst at GAMCO Investors, opts for Meta Platforms. Shares should benefit from the company’s focus on efficiency , with recent guidance pointing to continued ad acceleration. AI should also benefit this industry over the long run. Munster is betting on both Meta and Alphabet, believing their true growth rates are not fully priced into the stocks. AMZN 1M mountain Amazon shares over the last month Alphabet and Meta make up the majority of the advertising market, but Meeks said investors shouldn’t sleep on Amazon, with the tech investor opening a fresh stake in the e-commerce giant post-earnings. Meeks cited improvement in the company’s Amazon Web Services division as the main reason he bought shares, but noted that the ad business positively surprised many on Wall Street. Amazon posted a 22% increase in online advertising revenue year over year, and $10.68 billion in sales overall, with shares popping more than 8% in the session that followed. “I usually don’t like to chase stocks, but I still see an urgency to buy it,” Meeks said.
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