Digital ad inventory was destroyed in the midst of the coronavirus pandemic – and for good reason.
The world economy has stopped stridently. Consumers don’t go out, let alone spend on discretionary items. Companies have therefore cut their advertising budgets considerably.
There is no sugar. Things are going to go wrong in the world of digital advertising. You could very well see digital advertising revenue 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 the time has come to buy digital advertising stocks.
The rationale is quite simple. Advertising will not go away forever. Once the economy normalizes and rebounds – which should happen in the second half of 2020, assuming the coronavirus pandemic largely subsides by the summer – consumers will resume spending and businesses will will come back to advertising.
Advertising dollars always follow commitment. Digital platforms are currently experiencing a record level of engagement. So when ad spending trends rebound in the second half of 2020, digital platforms have a pretty good chance of turning record engagement into record sales.
In short, while the numbers for the second quarter of 2020 will be awful in the world of digital advertising, the figures for the second half of 2020 could be pretty good. Most digital ad inventory is down about 50% from recent highs. They are billed for the wrong T2 numbers. But they are not priced for good figures in the second half.
As such, from a risk-reward perspective over the next 6 months, the digital ad inventory looks really good.
With that in mind, here is a list of seven digital advertising stocks to buy for a rebound in the second half:
- Facebook (NASDAQ:FB)
- Alphabet (NASDAQ:GOOG)
- Break (NYSE:BREAK)
- Pinterest (NYSE:PINS)
- The Trade Desk (NASDAQ:TTD)
- Roku (NASDAQ:ROKU)
- Amazon (NASDAQ:AMZN)
Stocks of digital ads to buy: Facebook (FB)
Of all the potential digital ad inventory to buy for a rebound, the strongest is Facebook… for several reasons.
First of all, Facebook has a huge balance sheet with over $ 50 billion in cash, which gives the company sufficient resources to weather the coronavirus storm without any insolvency or liquidity issues.
Second, as one of the two largest digital advertisers with arguably the most proven advertising platform, Facebook is likely to increase its share of advertising dollars during the pandemic, as companies reduce advertising on less proven channels and double the advertising efforts on the most proven channels. .
Third, the company still has four apps, each with more than a billion users, and only two of them are fully monetized. The business’s long-term growth potential through increased advertising inventory and increased market share in the digital advertising market remains strong.
Fourth, FB’s shares are very inexpensive, with only 18 times the forecast earnings for which forecasts revenue and profit growth of 20% over the next few 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, Alphabet is one of the other strongest digital ad titles to buy for a rebound in the second half. Again, this is for a few (very similar) reasons.
First, Alphabet has arguably the strongest track record in technology, with almost $ 120 billion in cash and very little debt. This solid balance sheet will allow the company to better withstand the coronavirus storm than almost all other digital advertisers.
Second, Alphabet is also the largest player in the world of digital advertising. As a result, as businesses shift their advertising spend to larger platforms in the middle of the pandemic, this change will inevitably give Alphabet’s advertising platforms a boost.
Third, Alphabet’s largest non-advertising company – Google Cloud – is expected to perform well in 2020, thanks to increased demand for cloud infrastructure services, as businesses increasingly migrate processes, workflows and data to online channels.
Fourth, GOOG stocks are attractively valued, with only 21 times future earnings for what is expected to be double-digit revenue and earnings growth over the next few years (and potentially much more, depending on how Waymo will evolve).
Overall, therefore, Alphabet is a well-fortified long-term winner. It benefits from a favorable competitive positioning, solid growth prospects and relatively cheap valuation. This is a recipe for the success of the GOOG stock.
Snap is one of the digital ad titles to buy for a rebound in the second half with the most potential.
The instant stock was destroyed during the coronavirus pandemic. Shares have gone from $ 19 in early February to just over $ 12 today, fearing that as a smaller, newer player in the digital advertising market, the company will be disproportionately affected by budget cuts linked to coronaviruses.
That is true. Snap’s second quarter revenue could be very high, very ugly.
But, Snap recently reported that its platform had a record engagement in March. This record commitment will only increase in April, as consumers remain in quarantine. Such increases in engagement only increase Snap’s choking on young consumers.
A further stifling of this demography means that, once discretionary spending and advertising trends rebound in the second half of 2020, Snap could be a big winner for these advertising dollars.
Overview – while the second quarter figures can be horrible, the second half figures can be excellent.
At $ 12, the SNAP stock is fully valued for the first – and not at all for the second. My modeling suggests that a strong rebound in the second half could propel the SNAP action towards $ 20 by the end of the year, which would imply an increase of almost 100% compared to current levels.
Like Snap, Pinterest is another smaller digital ad stock with huge upside potential in the second half of 2020.
Pinterest is smaller and newer than Snap. So while the Snap stock has plunged into fears that its advertising platform will be disproportionately affected by the budget cuts linked to coronaviruses, the Pinterest stock has plunged even more into similar concerns.
In early February, this title exceeded $ 25. Today, stocks are close to $ 15.
Zooming out, this massive sale implies huge upside potential over the next six to twelve months.
Pinterest’s advertising platform is new. But it is far from bad. In fact, it’s pretty good. Pinterest users are high-intention users. They don’t aimlessly browse a Pinterest feed. Instead, they are looking for something to do. This intent-driven audience makes Pinterest users more likely to engage with and act on an ad – and through various innovations, Pinterest is improving the targeting and capabilities of its advertising platform to that brands can make the most of the unique and determined users of the platform.
In other words, Pinterest is building a special, strong and differentiated digital advertising platform. Of course, the company will report bad numbers in the second quarter. But, the underlying strengths of this new-style advertising platform will fuel a huge rebound in the second half once the trends in advertising spending rebound.
In this case, the Pinterest stock could explode higher. My modeling suggests that the stock of PINS could end the year around $ 20.
The Trade Desk (TTD)
For long-term investors, one of the best digital advertising headlines to buy on the current downside is The Trade Desk.
For those who don’t know, The Trade Desk is a demand side platform (DSP) which is a leader in programmatic advertising. Simply put, this means that the company provides advertisers with a platform that allows them to take advantage of intelligent machines and algorithms to buy ads automatically and dynamically, based on ad measurement data.
In short, programmatic advertising is smarter, faster, cheaper and better than traditional advertising. In the future, almost all ads will be processed programmatically. Today, however, the Trade Desk’s gross advertising spending is only 1% of total global digital advertising spending.
So the long-term opportunity for the Trade Desk to increase its share of global digital advertising spending is enormous.
Nothing in the coronavirus pandemic damages this tale of long-term growth. If anything, the coronavirus pandemic could accelerate this story of long-term growth. One of the main growth verticals of the Trade Desk is connected TV advertising, and connected TV advertising may actually accelerate in the aftermath of the pandemic.
The Trade Desk is a long-term winner, going through a difficult period in the short term. The rough patch will pass. Where appropriate, the secular growth trends that underpin this business will resume.
There are five big reasons to love the actions of streaming device maker Roku.
First, as mentioned several times before, the basic scenario for the coronavirus pandemic is that it will decrease in the coming months and that the economy and trends in advertising spending will normalize in the last six months.
Second, Roku likely sees record engagement in the second quarter of 2020, with consumers around the world locked inside and glued to television screens. Because ad dollars follow engagement, this record engagement lays the foundation for Roku to record record sales in the second half of 2020 once trends in ad spending normalize.
Third, one of the long-term implications of the coronavirus pandemic could be an acceleration of the transition from linear television to connected television. Bored consumers around the world are likely to increase their consumption of streaming TV content in the midst of the pandemic. Roku is a pure game on this change. 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, the long-term growth prospects remain solid. They will only get better if the trends in connected TV advertising get bigger thanks to the pandemic.
Fifth, the ROKU stock has dropped more than 40% in recent weeks. The shares are now trading at their most attractive valuation for several quarters. My modeling suggests that, assuming normalization of growth in the third and fourth quarters, the ROKU stock could reach $ 120 by the end of the year.
Last, but not least, on this list of digital ad stocks to buy for a rebound in the second half is Amazon.
Amazon is relatively new to the digital advertising game. But, the company has already caused a sensation, controlling around 4% of the market in 2019. Indeed, Amazon already has a huge user base with Amazon.com, and a ton of purchasing data on all of these users. Wide reach and tons of data equals a successful advertising business.
This booming advertising activity could in fact be stimulated in the long term due to the pandemic, thanks to the increased adoption of electronic commerce and more robust traffic via Amazon.com.
Meanwhile, Amazon’s cloud activity is also expected to be boosted in the long term due to the pandemic, as demand for cloud infrastructure services increases as the physical to digital transition accelerates.
Overview – Amazon’s e-commerce, advertising and cloud businesses could be affected by the pandemic in the near term. But, the three are in fact long-term beneficiaries of the coronavirus epidemic.
This means that the AMZN action is a classic case of short-term pain and long-term gain. The short-term pain will last for the next few months. The long-term gain will begin in the summer.
Luke Lango is a market analyst for InvestorPlace. He has professionally analyzed stocks for several years, previously working in various hedge funds and currently managing his own investment fund in San Diego. A Caltech graduate, Luke has always been ranked among the best stock pickers in the world by various other analysts and platforms, and has built a reputation for leveraging his technological background to identify growth stocks that generate returns exceptional. Luke is also the founder of Fantastic, a social discovery company supported by a Los Angeles-based venture capital firm. At the time of this writing, it has long been FB, SNAP, PINS, TTD and ROKU.