Advertising companies have a dirty secret…
I first wrote about this secret during the 1990-1991 recession. I was covering media stocks at the time…
In short, many investors believed media and advertising stocks were a great defensive play. Not so, I warned…
Falling revenue leads to cuts in all sorts of expenses, including advertising. That makes these types of companies vulnerable to the dirty secret – cyclicality.
Today, that’s more true than ever. But many investors are blinded to this painful reality…
You see, we didn’t talk about this idea too much during the past two recessions. We had bigger fish to fry.
The 2000-2001 recession focused on the implosion of new-technology valuations. And the recession in 2008 involved whether the global financial system would survive.
But the recession we’re in today looks more conventional. It’s about higher interest rates and costs pinching consumers and businesses.
So this time, advertising will have a much higher profile.
That’s a darn big deal. Think about it…
We’re not talking about newspaper ads anymore. This industry is mostly online these days.
The mega advertisers are tech giants like Alphabet (GOOGL) and Meta Platforms (META). They make up roughly 11% of the Invesco QQQ Trust (QQQ), a top tech-focused exchange-traded fund.
And as we’ll discuss today, the outlook for these businesses in this recession isn’t great…
In the past, like during the 1990-1991 recession, advertising related mostly to traditional media stocks. But now, it involves some of the world’s most glamorous corporate giants…
Technophiles love Alphabet. Its Google search algorithm is brilliant.
The company operates in all sorts of businesses – video, collaboration, connectivity, and productivity. And it’s getting into digital health care.
But advertising sales make up 81% of Alphabet’s revenue. This segment contributed $91.9 billion in operating profit last year. Meanwhile, the company’s other segments combined for an $8.4 billion operating loss.
Meta Platforms’ fans focus on content-display algorithms, connectivity tools, and things like that. Of course, most folks recognize it as the parent company of social media app Facebook. And the company’s move into the “Metaverse” is getting a lot of attention.
But advertising sales (99.3% of total revenue) are even more dominant at Meta Platforms than at Alphabet. This segment generated $56.9 billion in operating profit last year. In comparison, all other segments combined for a $10.2 billion loss.
So in this recession… we’ll see how productive newfangled advertising is.
Do video ads really attract a lot of business? Or do viewers wait eagerly until they can click on the “Skip Ad” button?
Are full-page or close-to-full-page ads effective? Or do users obsess about finding the clickable “X” that closes them?
We can’t take anything for granted until the evidence comes in. We learned that in the early days of the Internet…
Everyone thought “banner ads” were the way to go. But consumers ignored them. And when advertisers eventually realized that, the prices of banner ads collapsed.
Today’s advertisers enjoy sophisticated analytics. But how are they interpreting what they see? Do they really know what’s good enough?
It’s easy to be happy with the data in good times. But a recession is the ultimate test…
Tough times force everyone to get real. Will falling revenue force ad buyers to raise their standards of acceptability?
It’s hard for typical investors to unravel such issues. But fortunately, we can turn to the Power Gauge for guidance. Our system provides valuable insight once again…
Just look at Alphabet and Meta Platforms. The Power Gauge ranks both companies as “neutral” today. And the details show the full picture…
Alphabet’s category rankings for Financials and Earnings are “bullish” and “very bullish,” respectively. The system rates Technicals as “bearish” and Earnings as “very bearish.”
Meanwhile, Meta Platforms receives “very bullish” rankings for Financials and Earnings. And its Technicals and Experts category rankings are both “very bearish.”
Based only on valuation and fundamentals, these stocks would both be screaming buys. That’s why it’s critical to see the full picture…
The Technicals and Experts rankings for Alphabet and Meta Platforms are all poor. That’s important because both of these categories signal worries about the future.
So for now, let’s focus our attention – and money – elsewhere.
Good investing,
Marc Gerstein
