Our theme of Ad Tech Stocks — which includes Internet platforms and ad technology players — is down nearly 56% since the start of the year as the U.S. and global economy face multiple headwinds, underperforming the Nasdaq-100, which is down about 29 % remains lower than the same period. While growth stocks in general are suffering from rising prices, high inflation and a slowing economy are also forcing companies to review their advertising budgets. This has a direct impact on the revenue growth of ad-tech players. The most recent quarterly results from the major digital advertising players were weaker than expected. Alphabet, the leading digital advertising provider, saw profits fall 27% year-on-year, while sales grew just 6%. Facebook parent company Meta Platforms also reported its second consecutive quarterly revenue decline in the third quarter and forecast another year-over-year decline in the fourth quarter.
However, there are also several redeeming factors. While the advertising market is likely to be impacted across the board in the event of a recession, we think much of the decline has already been priced in. In addition, digital ads offer better measurement and targeting capabilities than other ad formats and this could play a role in favor of ad tech majors as customers look for a better return on their ad spend in a weak economy. In addition, valuations in the sector are starting to look attractive again. For example, Meta Platforms trades at just 14x 2023 consensus earnings, while Alphabet trades at about 18x 2023 earnings. It is very likely that growth will eventually pick up for most of these companies as the economy recovers and inflation cools, ultimately allowing these stocks to receive a higher rating.
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