Talk of a so-called ad recession has monopolized earnings conversations this season, as big tech companies warn of declining ad revenue as consumer spending declines and marketing budgets shrink. That, combined with the continued headwinds of Apple’s privacy changes, is wreaking havoc on the tech and social media industry, where advertising is a big part of revenue. While the conditions could spell trouble for these players in the months ahead, some stocks are better insulated from these headwinds. Investors looking to play the trend should consider focusing on search names and those that differentiate themselves from Apple’s privacy policies, analysts say. Some of the biggest names in the industry have started to feel the effects of an advertising slowdown. Snap attributed its recent dismal results to slowing advertising demand and also blamed Apple. Meta also blamed a disappointing third-quarter forecast on weaker advertising, while Roku shares cratered more than 23% following dismal results that it blamed on a slowdown in advertising. Shares of all three stocks are down more than 50% this year, with Snap shares falling nearly 88% from their 52-week high. Big tech isn’t the only area of the advertising market to be affected. The softening environment is weighing on streaming names like Paramount, Warner Bros. Discovery and Fox, and will likely continue in the near future, said Peter Supino of Wolfe Research in a recent note to clients. “We will see market shares change as the pie stops growing or shrinks over the next six months,” said Rohit Kulkarni of MKM Partners. Betting on search and Google Many analysts believe that search names – especially Alphabet – are among the companies best positioned to weather volatility and say they should continue to take market share from others. Kulkarni notes that search generally focuses on behaviors and that the user is actively searching for similar terms. This generally makes it easier for advertisers to target, collect data, and ultimately see better payout – and that’s easily measured by clicks. The method was also unaffected by Apple’s privacy concerns, which plagued many social media darlings. “Research is very well positioned to weather the storm because it is very broad,” said Andrew Boone, analyst at JMP Securities. “It basically covers goods and services, and because of that breadth, one coin can offset another.” Alphabet said in a recent earnings call that Google search and other ad revenue rose 14% to $40.7 billion, while searches for terms such as “open now” and “close to home” had increased 8x year-over-year globally. The stock is down about 19% this year. Google search is usually the first and last step for a consumer, making it an integral part of the consumer experience, MNTN CEO Mark Douglas explained on “The Exchange” last month. Most corporate budget cuts in the future are likely to come from brand advertising, which is furthest from the consumer, he explained. “These business models that combine both advertising and e-commerce are going to show further resilience as we navigate these macro dislocations in the second half of the year,” Wells Fargo’s Brian Fitzgerald told ” Squawk on the Street” earlier this month. Look outside the Apple ecosystem Apple’s iOS changes are another factor that continues to put a damper on ad dollars. Implemented last year, the change prevents ad-supported sites from accessing an iPhone or iPad’s unique identifier without the user signing up and makes it increasingly difficult targeted advertisements. As a result, companies outside of the Apple funnel are better positioned to weather this advertising downturn, said Barton Crockett, analyst at Rosenblatt Securities. Crockett pointed to search heavyweight Alphabet and e-commerce giant Amazon, which have benefited from advertising dollars moving away from the Apple ecosystem as advertisers look for ways to measure return on investment. Certainly, some companies are making progress in finding ways to circumvent the challenges of identifier for advertisers (IDFA), but there is no easy solution, said Maria Ripps of Canaccord Genuity in a recent note to clients, noting that these obstacles affect small and medium-sized enterprises. commercial advertising of particularly difficult size. “These dynamics have a more acute impact on SMBs than large enterprises, as SMBs tend to be more performance-driven and are heavily focused on short-term ad ROI,” she wrote. . Looking Away From Big Tech Many lesser-known names could also offer opportunities to ride out the ad recession, some analysts say. Loop Capital’s Yun Kim called DoubleVerify Holdings a good name to weather the downturn, saying in a note to clients that the company’s focus on ad volumes over price positions it better in this environment. . “With the current downturn in the digital advertising industry driving down overall prices, we expect brands to increase their ad placements to take advantage of this market situation, even if their overall digital ad budget is under pressure,” Kim said. KeyBanc Capital Markets’ Justin Patterson favors companies with limited international exposure and those focused on connected TV, pointing to names like The Trade Desk. While not completely immune to macro conditions, the company’s access to “high growth channels” such as political ad spend is an advantage it has over some larger players, he wrote. Many local TV companies also appear to be benefiting from this early part of the ad slump, spurred by strong labor market trends and local businesses, Crockett said. For example, Comcast’s NBCUniversal saw a roughly 1% decline in year-over-year ad revenue, although the parent company’s cable segment saw ad sales increase 10% in that year. period, in part due to the increase in political ads, he mentioned in a remark to clients. “This is the most curious advertising recession in history,” Crockett said. “We’ll see how it evolves from here.” – CNBC’s Michael Bloom contributed reporting Disclosure: NBCUniversal is CNBC’s parent company.
These stocks are best positioned to weather an advertising recession