With some macro indicators pointing to a recession, many companies will likely cut ad spending to defend against the slowing economy. This is a feature we have seen in past recessions. However, we’ve also typically seen ad spend skyrocket when the economy recovers.
Knowing this, savvy long-term investors should view the current situation as an excellent opportunity to buy shares in advertising-focused stocks like Alphabet (GOOGL 1.84%) (GOOG 1.79%), The trading post (TTD -4.52%)and PubMatic (PUBM 2.22%) at a discount. These three stocks are heavily sold on short-term macro fears. Let’s see why this pessimism can be put to your advantage.
Alphabet is the parent company of three platforms that rely heavily on ad revenue: Google, YouTube, and the Android operating system. About 80% of Alphabet’s overall revenue comes from these business segments, making them vital to the bottom line of America’s third-largest company. These segments work so well because they tend to be premium platforms for advertisers to reach their target audiences.
The broader fear of lower ad spend means companies need to focus their ad spend in areas where they will be most effective. Basically, they should try to get the most out of their money. This is where Alphabet’s premium offerings have the edge. During the last Great Recession, Alphabet’s revenues barely declined and the company maintained its strong profitability. Even during the COVID-19-induced recession in 2020, Alphabet’s revenues remained stable.
In the second quarter, Alphabet reported revenue growth of 13% year-over-year, and its operating margin remained relatively resilient at 28%. These results are part of the company’s tendency to stay strong during tough economic times.
As it cuts expenses and slows hiring, Alphabet’s management is pivoting its operations to deal with a tough business environment. This seasoned management team knows how to navigate recessions, and the stock is poised to rally strongly when the economy recovers.
2. The Trading Post
The Trade Desk is not a direct advertising game like Alphabet. Instead, its software facilitates and manages transactions between ad buyers and sellers. With analytics from The Trade Desk, advertisers can understand how their campaigns are performing and adapt to target different audiences.
The Trade Desk began operations just after the Great Recession, and the COVID-19 recession was not long enough to judge its performance during times of stress. Therefore, investors will need to trust management’s ability to navigate the current environment.
Trade Desk management has worked to diversify revenue streams across multiple countries, giving it some resilience when a market slows. Analysts do not expect its revenue to slow in the current quarter. Forecasts call for sales growth of almost 40% in the second quarter and 36% in the third quarter. The fact that the forecasts announce such growth in the current economic environment is encouraging and illustrates the potential of the company.
The Trade Desk’s recent partnership with waltz disney. This partnership should help advertisers more effectively automate targeted campaigns on Disney-owned web properties. In the long term, this could boost the growth of both companies.
Expected strong revenue growth and a far-reaching partnership bode well for the stock’s long-term growth. Coupled with an expensive (but still reasonable for a fast-growing company) valuation of 54x free cash flow, its current price could be a bargain.
While The Trade Desk works on the buy side of the programmatic advertising exchange process, PubMatic is on the sell side, helping buyers reach viewers in a targeted way. Although it offers many solutions, the area its management is most excited about is connected TV, which increased its delivery rate fivefold in the first quarter compared to the year-ago quarter.
PubMatic grew first-quarter revenue 25% year-over-year to $55 million, while maintaining a 9% net profit margin. Analysts expect PubMatic to rise about 22% over the next two quarters, but the stock is trading for a favorable valuation of 15 times earnings.
PubMatic is not very big, with a market capitalization of around $861 million. Still, it has the potential to explode higher and be one of the top performing stocks when ad buyers come back in force to buy the inventory that PubMatic is involved in selling.
Ad spending will affect all three companies to some extent in 2022. How long it will take for the economy to recover is anyone’s guess, but eventually it will come back strong. It’s nearly impossible to time a market bottom, so getting into these three stocks now gives investors the best chance to ride the wave of recovery.
Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Keithen Drury holds positions at Alphabet (C-shares), PubMatic, Inc. and The Trade Desk. The Motley Fool owns and recommends Alphabet (A shares), Alphabet (C shares), PubMatic, Inc., The Trade Desk and Walt Disney. The Motley Fool recommends the following options: January 2024 long calls at $145 on Walt Disney and January 2024 short calls at $155 on Walt Disney. The Motley Fool has a disclosure policy.