This article was originally published on Forbes on Forbes Forbes on Mar 14, 2024,07:01pm EDT

Ad spending growth is widely forecast to accelerate in 2024, after a challenging macro environment significantly dented budgets and growth in 2023. The US advertising market is already showing positive signs of growth, starting off 2024 with a 4.3% YoY increase in January, the strongest January on record and a tenth straight monthly increase.

We’re tracking ad-tech at the moment for three key reasons: a robust ad market backdrop with multiple major event tailwinds, strong cash flow generation, and improvements in operating leverage. We’ve previously covered the 2024 outlook for four major digital advertising verticals in our analysis “Ad Spending Growth to Accelerate In 2024” at the end of December; now, we take a look at three of the advertising industry’s top stocks: Meta, The Trade Desk, and Alphabet.

Meta: The Juggernaut Has Returned

The Juggernaut is back — Meta has been the second-best performing stock of the Magnificent 7, with its 44% return since the end of 2021 and a 301% return since the end of 2022 beaten only by Nvidia. This rally has been supported by significant improvements in operating leverage as revenue growth has reaccelerated to the mid-20% range.

Meta has stood out amongst social media peers for its strong growth in ad impressions, a recovery in ad pricing, and its ability to generate strong cash flows while still spending tens of billions on R&D. We’ve tracked Meta’s strong ARPU acceleration, but the more impressive (and arguably more important) story for Meta is how this translates into a substantial degree of operating leverage.

Meta’s operating margin expanded over twenty percentage points YoY to 40.8% in Q4, returning to a margin not seen since Q1 and Q2 2021. FY23 operating margin improved 990 bp YoY to 34.7%, with room for improvement in FY24. This is helping drive a strong improvement in the bottom line, with Meta reporting a net margin of 34.9%, a second straight quarter above 33% and a strong 2040 bp YoY expansion. Improvement from the 2022 bottom in fundamentals is easily visible in the chart below.

Source: YCharts

The rebound in leverage comes despite Meta pouring tens of billions into Reality Labs – operating loss for Reality Labs totaled ($16.1) billion for FY23, or a massive ~1195 bp headwind to operating margin.

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Meta’s Momentum to Continue in 2024

Meta’s momentum with strong revenue growth is expected to continue in 2024, supported by ARPU trends. In addition, the implementation of AI features, a favorable ad market backdrop, and improving operating leverage supports substantial EPS growth this year.

Meta guided for a very strong Q1, calling for 24.8% YoY growth, a third straight quarter with growth >20%, though it comes against a weak 2.6% YoY comp. Accelerating ARPU in Facebook’s two core geographies, the US/Canada and Europe, supports this revenue growth story.

Source: Meta

Also supporting the growth story is a favorable social media ad spend backdrop, as well as major political and sporting events, namely the US presidential election in November and the Summer Olympics. Globally, social media ad spend has one of the fastest projected growth rates in the ad industry at +13.8%.

In the US, growth is expected at a similar rate, with Insider Intelligence projecting 13.5% YoY growth to $82.9 billion. This represents a $7.8 billion increase from their Q1 2023 forecast, with the market benefiting from “higher ad loads, a focus on lower-funnel ads, and an improved advertising economy,” driven by both Meta and TikTok.

For 2024, key metrics are supporting a return to >40% operating margin for the full year and a possible >33% net margin, driven by increasing ad pricing, strong engagement trends and impressions growth, aided by the release of numerous AI features. Reaching those margins for the full year would imply EPS growth of nearly 38% to $20.50 on $160B in revenue. Meta would be trading at a 24x forward PE ratio under that EPS growth assumption, 15% cheaper than its 5-year average PE of 27x; however, this is the peak multiple we’ve seen so far in Meta’s rally.

The Trade Desk: CTV Tailwinds Offer Growth Outlet

The Trade Desk, which offers a cloud-based digital advertising purchasing and optimization platform for advertisers across many mediums, from CTV to display, audio, digital out-of-home, and more, continues to be one of the fastest growing ad-tech stocks in the industry. Revenue grew 23% in FY23 to $1.95 billion, outpacing a tepid ad market but representing a 9 percentage point deceleration from 32% revenue growth in FY22.

Though revenue has decelerated, profitability has remained solid, and GAAP net income more than tripled YoY to a nearly 10% margin this year, though that is much lower than historical levels. Operating income is showing signs of stability and improvement on a TTM basis, after periods of volatility in 2021 and 2022.

The Trade Desk's operating income has quadrupled from $50 million in early 2017 to $200 million in2023 despite a deterioration in operating margin. Source: YCharts

Despite a steady deterioration in TTM operating margin over the past six years, from the 30% range to the 10% range in FY23 (after briefly dipping negative), operating income has grown, in fact it has quadrupled from $50 million in early 2017 to $200 million in 2023.

The challenge now for The Trade Desk is maintaining this more rapid trajectory in operating income growth through 2024 and into 2025 given that revenue growth is expected to decelerate. This will be critical in driving expansion in GAAP net margin, which hovers just below 10% currently, compared to above 15% as it had maintained for more than three years.

The Trade Desk's net profit margin hovers just below 10% currently, compared to above 15% as it had maintained for more than three years. Source: YCharts

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CTV, Kokai Provide Growth Opportunities in 2024

CTV ad spend and the ramp of The Trade Desk’s new AI-powered buying platform Kokai offer two potential growth outlets for 2024.

CTV ad spend is forecast to be digital advertising’s fastest growing channel this year, with Dentsu placing growth at 30.8%, while BIA is expecting growth as high as 39.5%. CTV ad spend in total has surged 400% since 2019, as use of streaming services soared through 2020 and 2021; now, rising adoption for major streamers’ ad-supported tiers beckons to bring more spend through CTV. This trend bodes well for The Trade Desk, as CTV “continues to be the fastest-growing channel at scale” for the company, as it sees that “ad supported streaming is going to be an essential strategy for any successful TV provider moving forward.”

Kokai, which launched in June 2023 as The Trade Desk’s AI-powered buying platform, has been labeled by CEO Jeff Green as the “largest platform overhaul” in its entire history. Kokai will be scaling throughout the year, and promises a new degree of optimization for ad buyers while providing KPIs throughout the entire funnel, instead of simply at the last click. In essence, The Trade Desk sees Kokai as an “upgrade in almost every way” to its existing platform.

Though determining the growth trajectory of Kokai over the next few quarters may be challenging, tracking gross spend and The Trade Desk’s take rate provides insights into revenue acceleration trends, and if Kokai and a strong CTV ad market are driving an acceleration in spend and improvements in take rate.

Source: The Trade Desk

The Trade Desk’s take rate has fluctuated between 19% and 21%, hovering around 20.3% in FY23. While it may seem obsolete to track a metric that fluctuates within a tight 200 bp range, the impact of a 100 bp change in take rate is actually quite large. Take FY21 as an example, when The Trade Desk recorded its lowest take rate at 19.4% — had this been 100 bp higher at 20.4%, revenue growth in the year would have been 700 bp higher, at 50% versus the 43% reported growth.

If gross spend can accelerate via a robust CTV market and Kokai’s improvements and efficiency gains for buyers, maintaining a take rate above 20% or driving growth to above 20.5% can help revenue growth accelerate to the high-20% range. However, the upcoming phase-out of cookies provides a significant risk to take rate, in that if The Trade Desk fails to get significant adoption of UID 2.0, which is the second most-used cookie replacement, it may struggle to command such a high take rate due to a loss of targeting ability in a cookie less digital environment.

Alphabet: Beneficiary of Search, CTV Ad Spend

Alphabet is a beneficiary of both search and CTV ad spend, and has seen growth accelerate this year as it works to integrate generative AI features and AI-based tools to drive improved ROI for advertisers – Alphabet recently reorganized its digital ad business to place more emphasis on generative AI and AI automated ads.

Alphabet reported $65.5 billion in advertising revenue, up 11% YoY, its first double-digit growth rate in six quarters, driven by strength in Search and YouTube. Alphabet has nearly doubled its quarterly run rate in just four years.

Source: Alphabet

Search and YouTube ad revenue growth accelerated in each quarter this year, from the low single-digits to 12.7% and 15.5% in Q4 respectively. What Alphabet is demonstrating is that AI-powered ad solutions are helping drive resilient Search ad revenue growth, at the same time that strong engagement metrics for YouTube Shorts (>2B MAUs, 70B daily views) and increasing watch times for YouTube TV are boosting YouTube’s ad revenue growth.

Source: Alphabet

AI Integrations Provide Opportunity for Growth

Alphabet is steadily making progress in integrating AI features in Search via Search Generative Experience (SGE) and in advertising campaigns via Performance Max (PMax). Executives have previously mentioned how these “AI-powered solutions like Search and PMax are helping retailers drive reliable, strong ROI and meet customers wherever they are across the funnel.” This is the value-add of SGE and PMax – driving CPM higher from via higher ROIs from improved targeting and optimization, while letting Alphabet toy with new ad placements and formats in Search pages. Alphabet sees “significant opportunities” to “actually deliver incredible ROI at scale” from these AI-powered features.

Alphabet’s Demand Gen is instrumental in driving long-term growth momentum across its more than 3 billion monthly active YouTube and Gmail users. Alphabet explains it as its “big bet to help social advertisers find and convert consumers via immersive, relevant, visual creatives” across these channels. Alphabet shared some color on Demand Gen in Q4, saying that “tens of thousands of advertisers are testing and, on average, seeing 6% more conversions per dollar versus image-only ads in Discovery campaigns.”

Gemini is also playing a more forward facing role in advertising products, powering Alphabet’s new conversational features in Google Ads. While it is still in beta in the US and UK, early tests have shown “advertisers are building higher-quality Search campaigns with less effort,” streamlining the campaign building process.

Cash is King

As the saying goes, cash is king, and Meta, Alphabet, and The Trade Desk stand out for strong cash flow generation metrics. Meta leads the Magnificent 7 with a nearly 53% operating cash flow margin, while The Trade Desk and Alphabet command OCF margins in the low-30% range.

Source: YCharts

To put how strong this cash flow generation is in perspective, Meta and Alphabet have grown operating cash flow 1,400% and 425% respectively. This is incredibly impressive given the scale of the duo’s cash flows, with Meta generating $71 billion and Alphabet $101 billion.

Conclusion

Ad-tech stocks are on 2024’s watchlist for a few reasons: strong cash flow generation and growth, a positive ad-market backdrop buoyed by major political and sporting events, and implementation and integration of AI features to help drive improved ROI for advertisers. Meta, Alphabet and The Trade Desk look best positioned to capture and capitalize on the ad industry’s acceleration this year.

My firm is not buying these stocks at the moment as we believe we can get them lower than where they’re currently trading. Though Meta is trading lower than its 5-year average PE ratio, it’s at the peak level sustained so far during 2023’s rally, leaving less room for upside. On the top line, it trades at a 9.6 with 11 being the highest its traded since 2019 (the stock was valued at 11 during Covid when ad-tech was surging from high social media use). The 3-year median is 6.4 and the 5-year median is 8.3.

Alphabet is the cheapest of the Mag 7, trading at a 20x forward PE although EPS growth is expected to be more tepid at just 17% this year, versus 38% for Meta. The company is trading right at its 3-year median and 5-year median on a PS ratio. Some of the softer price action could be due to the anti-trust lawsuit which has closing arguments set for May.

The Trade Desk is more expensive than the two on the bottom line, trading at 123x forward earnings, although it is expected to deliver 82% growth to $0.66 in GAAP EPS. Its trading at it’s 3-year median and 5-year median with a PS ratio of 20.6.

Every Thursday at 4:30 pm Eastern, the I/O Fund team holds a webinar for premium members to discuss how to navigate the broad market, as well as various stock entries and exits. We offer trade alerts plus an automated hedging signal. The I/O Fund team is one of the only audited portfolios available to individual investors. Learn more here.

I/O Fund Equity Analyst Damien Robbins contributed to this report.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

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This article was originally published on Forbes on Dec 27, 2023, 07:15 am ESTForbes Forbes on Dec 27, 2023, 07:15 am EST

Ad-tech stocks have generally enjoyed strong returns in 2023, buoyed by a rather fierce tech rally. Ad spending growth showing initial signs of stabilizing in the back half of the year, with ad spend growing YoY in each month from July to October.

Ad spending growth is widely forecast to accelerate in 2024, after a bumpy start to 2023 stemming from macro uncertainty as growth forecasts were pulled lower mid-year. The market looks to be cheering on a return to higher growth in 2024, along with new synergies from generative AI advertising offerings from Big Tech and pockets of stronger growth in digital and retail media ad spend.

Lower budgets in 2022 and early 2023 affected nearly every ad-tech stock, including companies that draw audiences in the billions – on a three-year basis, only three of ad-tech’s primary names have a positive return: The Trade Desk (TTD), Alphabet (GOOG), and Meta (META), and the latter two only recently broke back into positive territory. The rest of the sector is still struggling to cope with a significant slowdown in growth, from 19.6% in 2021 to the low single digits in 2023.

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Growth Forecast to Gain Steam

Growth forecasts from Magna, Dentsu and GroupM generally point to an acceleration next year, at around 5.7% on average between the three, compared to 4.7% in 2023.

Source: I/O Fund

Dentsu is projecting 4.6% YoY growth in 2024, almost 2 percentage points higher than its final 2.7% growth forecast for 2023. This outlook is positively impacted by stronger growth in CTV, digital and retail media ad spend. However, Dentsu sees media price inflation contributing 2.1 percentage points of growth in 2024; stripping out that effect, global ad spend is expected to increase just 2.5% YoY, a slight deceleration from 2023. media price inflation contributing 2.1 percentage points of growth in 2024; stripping out that effect, global ad spend is expected to increase just 2.5% YoY, a slight deceleration from 2023.

Magna tends to lean more bullish in its forecasts compared to Dentsu, projecting 5.5% growth in 2023 and a 1.7 percentage point acceleration to 7.2% in 2024. Magna’s outlook is boosted by “economic stabilization and lower inflation,” themes that have been broadly supported by a slew of macroeconomic data over the past two months. Magna and Dentsu both see positive effects from political spend, and major sporting events including the UEFA EURO 2024 and the Summer Olympics.

GroupM is forecasting a 0.5 percentage point deceleration to 5.3% growth in 2024, with this weaker outlook driven primarily by “uncertainty in some markets and interest rates.” Despite the weaker forecast, GroupM is more positive on retail media ad spend, similar to Dentsu, seeing the segment growing 8.3% in 2023.

Below, we will take a look at some of the dominant names across four major digital advertising categories: search, social media, streaming/CTV, and retail media for more color on the ad industry in 2024. 

The I/O Fund provides entries and exits through real-time trade alerts for the stocks the portfolio owns. The team is ramping our analysis for our 2024 portfolio now. Learn more here.here.

Search Ad Spend to Decelerate, But AI Showing Promise

Search ad spending is projected to decelerate in 2024, dropping from an expected 12.5% in 2023 to a projected 9.5% next year as advertisers shift dollars to other mediums, primarily social media and CTV. Even with this deceleration, search ad spend is still projected to outpace global ad spend’s growth.

Google has seen Search revenue growth accelerate in each quarter this year, from just below 2% in Q1 to 11.3% in Q3 – the highest growth in five quarters driven by retail vertical growth. What Google is showing in Q3, and likely in a similarly strong Q4, is that AI-powered ad solutions are helping drive resilient Search ad revenue growth.

Google is rolling out AI-driven features and is now reorganizing its digital ad business to place more emphasis on generative AI and AI automated ads. SVP Phillip Schindler explains that these “proven AI-powered solutions like Search and PMax are helping retailers drive reliable, strong ROI and meet customers wherever they are across the funnel.” Increased ROI and improved targeting help keep advertisers engaged and could potentially draw some additional advertising spend to Search.

Source: I/O Fund

We discussed in the past how Google is on the precipice of a multi-decade disruption driven by generative AI: Google is showing early promise with Search Generative Experience (SGE), while Microsoft is actively deploying generative AI to search via Bing Chat.

Deploying generative AI search experiences opens the door for different ad formats and placements, as well as an increase in surfaced links and content. AI can also drive help revenues higher from bid optimization. Google’s AI campaigns, including Performance Max and Smart Bidding, are tapping AI and machine learning tools to analyze millions of data signals to better predict future ad conversions and improve bidding performance.

Today, Google dominates the search advertising market, with estimates placing the giant holding over 60% of the market, however, anti-trust risk is still present for Google as regulators seek to determine if the company has been engaging in anti-competitive behavior across its search engine and demand-side platform (DSP).

For a deeper dive into Alphabet and how the Search giant is entering its Year of Execution, read more here.here.

Social Media Ad Spend Remains Robust

Social media ad spend is expected to remain robust in 2024, and may potentially overtake search ad spending this year, according to estimates from WARC. This medium will enter 2024 with one of the fastest projected growth rates at +13.8%, with spend estimated to climb to $227.2 billion, or less than 1% below search advertising’s $229.2 billion.

Social media’s share of total daily time spent on the internet remains above 35%, at more than 2 hours and 20 minutes per day on average. Combine that with billions of MAUs across the most popular platforms, and it’s easy to see why social media continues to be a popular place to park ad dollars.

Meta dominates the market with more than 60% share and has shown positive trends heading into the end of 2023 that are likely to carry over into 2024. Advertising revenues rose 23.5% YoY to $33.6 billion in Q3. This was driven by 34.2% growth in Europe to $7.77 billion as ARPU rose 33.8%, and 16.8% growth in US and Canada to $15.19 billion.

Pinterest (PINS) and Snapchat (SNAP) also mirror the trend of strong European growth, with Pinterest reporting European revenues rising 33% to $618 million as ARPU increased 26% in Q3. Pinterest said that its shift to Direct Links generated “88% higher outbound click-through rates and a 39% decrease in cost per outbound click for CPC objectives” for early adopters.

Snapchat’s European revenues rose 19.6% as ARPU rose 15.3%, the slowest of the three but much quicker than its overall revenue growth of 5.3%.  

Source: I/O Fund

There are two factors currently driving this strong increase in revenues, especially for Meta – a surge in ad impressions to >30% YoY growth, and a recovery in ad pricing, which is nearing an inflection back to growth after declining throughout 2022 and 2023 to-date.

Engagement trends also remain positive, from both a user and advertiser standpoint. Meta noted that “AI-driven feed recommendations continue to grow their impact on incremental engagement,” driving a “7% increase in time spent on Facebook and a 6% increase on Instagram” this year.

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Streaming/CTV to See Double-Digit Growth

With 91.8% of internet users between ages 16 to 64 watching content via streaming services, it’s easy to see why advertisers are favoring CTV and YouTube over linear TV. CTV ad spend has risen 400% since 2019, as use of streaming services surged through 2020 and 2021, while linear TV spend has been declining. CTV ad spend is forecast to be the fastest growing channel next year – Dentsu places growth at 30.8%, while BIA expects growth as high as 39.5%.places growth at 30.8%, while BIA expects growth as high as 39.5%.

Major streaming providers had expanded into ad-supported tiers, which are demonstrating both strong growth and strong ad revenue generation. Netflix’s ad-supported tier accounted for 30% of all sign-ups in September and now accounts for ~6% of all US subscribers, per Antenna.

• Netflix is projected to reach $1.03 billion in ad revenue in 2024, an estimated 50.3% increase from ~$684.6 million in 2023, according to Insider Intelligence.
• Disney+ is expected to see a slower ramp in ad revenue, with a projected 16.1% increase to $911.9 million in 2024 followed by a 20.2% increase in 2025.
• Amazon is rolling out its ad-supported Prime Video tier next year, and is projected to generate $3.13 billion in CTV ad revenue, topping Roku to become the third-largest CTV ad platform.
• YouTube is also sharing in these gains, with ad revenues rising 12.5% to $7.95 billion in Q3, the fastest growth rate in six quarters.

Source: I/O Fund

Although Roku saw strong contributions from video advertising, it added a bit a caution on the market, saying that the “macro environment continued to pressure the overall U.S. advertising market” in Q3. Roku sees video ads continuing this trajectory in Q4 as it witnesses positive ad momentum driven “in part by diversifying demand sources of advertisers on our platform and expanding partnerships.”

The Trade Desk CEO Jeff Green summed up the CTV opportunity perfectly: “‘Executives at every major streaming giant with both an ad-supported and an ad-free tier, (including Disney, Netflix, Paramount, Warner Bros Discovery and NBC Universal) say that total revenue per user is higher on the ad-supported plan than it is on the ad- free plan.’ Not only do media companies generate more revenue per user within an ad supported option, but the potential for growth is much greater. Ultimately, there’s a limit to how much viewers will spend on subscriptions. Economic pressures on the consumer, right now, are increasing the appeal of a free or low-cost option, that is supported by ads. However, this model is only sustainable if the ad load is significantly lower than traditional linear TV. And the only way we get there is if the ads are relevant to the viewer, so that advertisers are willing to pay more for each of them.”

Retail Media Emerging as One of the Fastest Growing Categories

Retail media ad spend is quickly emerging as one of the fastest growing digital ad categories — US retail media ad spend is forecast to grow nearly 23% next year to more than $55 billion before almost doubling by 2027. Globally, retail media ad spend is expected to increase 10.4% to $141.7 billion, driven by this US growth. Amazon and Alibaba are a dominant duo in this market, with nearly 70% estimated share in 2023, but Walmart, Etsy, eBay and other retailers and e-commerce platforms share in the gains.

Retailers and advertisers are prepping for a longer and stronger holiday season, with holiday spending on the rise despite weaker consumer sentiment. Amazon is “still seeing a lot of strength in the lower-funnel ad products like sponsored products,” even as companies remain a bit more cautious on upper-funnel ads such as display and video.

Amazon’s ad revenues grew 26% YoY in Q3 to more than $12 billion, setting up for a potential $14 billion quarter in Q4 with supporting seasonal strength. For 2024, Amazon is expected to drive a majority of the market’s growth, as it is forecast to see ad revenues rise 16.7% from $45.4 billion to $52.7 billion. Amazon’s Q4 and Q1 ad revenue growth will give a clue into how retail ad spend growth may unfold.

Source: I/O Fund

Other benchmark companies are showing similarly strong trends: Meta noted that its “online commerce vertical was the largest contributor” to growth in Q3, while its AI tools for Advantage+ shopping campaigns “reaching a $10 billion run rate” with more than half of its advertisers using those tools.

2024 Outlook

2024 is widely expected to see an acceleration in ad spending, with major sporting events and political spend aiding the growth forecast. Retail media is expected to see 23% growth in the United States as it begins to shift to other mediums. CTV’s rapid growth outlook of 30% to 40% is boosted by major streaming media companies introducing ad-supported tiers. CTV ads are currently expected to be the strongest growing segment of the four covered here.

Although search ad spending is forecast to soften, Google’s reorganization of its digital ad business to further integrate and utilize generative AI shows promise in reinvigorating growth. Social media ad spend remains robust, and improving pricing trends combined with strong impression growth and AI opportunities could send growth higher next year.

Macro uncertainties are not completely out of the picture. 2022 and early 2023 saw ad-tech stocks get pummeled as growth slowed dramatically from macroeconomic headwinds, so a resurgence of economic growth concerns and any potential budget optimization trends among major advertisers could dent the strong returns enjoyed by a plethora of ad-tech stocks this year. What’s most important to remember is that ad spending can be paused very quickly or resumed quickly, and so this sector is known for sharp moves. We continue to monitor this sector as we build our 2024 portfolio.

I/O Fund Equity Analyst Damien Robbins contributed to this report.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

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This article was originally published on Forbes on Jan 27, 2023,12:17am ESTForbes on Jan 27, 2023,12:17am EST

Ad-tech stocks across the board had a tough year last year. Investors are hoping that 2023 will be a better year, yet according to the projected ad spend for 2023, this may not be the case.

It’s clear that lower ad budgets in 2022 affected nearly every ad-tech stock, including companies that own large audiences, such as Alphabet and Meta. It did not matter if an advertising company has audiences as large as 2 billion or more, runs large R&D departments that can leverage AI, or is centered in the leading media growth trend of connected TV (CTV) ads. Broadly speaking, because ad spend budgets were slashed on a year-over-year basis, this one, single headwind caused 50% to 80% selloffs across the advertising industry. Therefore, it’s prudent to look at whether ad-tech budgets will increase this year or if 2023 will look more like 2022 in terms of top line growth.

Here’s What Happened to Advertising Stocks in 2022

The stock market of 2022 was hectic, and the blowoff top in 2021 is primarily blamed for this. However, irrespective of the stock market’s performance in 2021, the global economy and the United States economy is in a slowing growth environment.

Here is a quote from Insider Intelligence published in November:

“Total digital ad spending worldwide will not grow as robustly over the next two years as we expected in our Q1 forecast. We now project 2022 digital ad spending worldwide to reach $567.49 billion, up 8.6% over 2021. In our previous forecast, we expected 15.6% growth to $602.25 billion. Our Q1 forecast predicted digital ad spending worldwide would reach $756.47 billion by 2024, but we now expect it to reach only $695.96 billion.

The key words here are “will not grow as robustly as we expected.” Stock investors get trapped when growth slows and forecasts come down mid-year. This is because not only must stock valuations contend with a growth rate cut in half (8.6% versus 15.6%) — but analysts must also try and figure out when a bottom will form on the slowing growth. Most will lean conservative, which pushes valuations down even further.

GroupM also lowered their forecast for 2022, from 8.4% to 6.5% (excluding US political advertising), and pure play digital advertising was cut from 11.5% to 9.3%.

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What to Expect for Ad Spend in 2023

According to the sources noted above, 2023 will not be the year of recovery for ad budgets. As of now, growth is expected to be lower than 2022.

Magna predicts that global advertising revenue will grow to $833 billion in 2023, or about 5% year over year, compared to 7% in 2022. GroupM is projecting 5.9% growth, or $856 billion in 2023 (excluding US political advertising), compared to 6.5% in 2022 (excluding US political advertising). Both of these 2023 estimates reflect downward revisions of 1.5% and 0.5%, respectively. Including US political advertising GroupM is projecting 7.8% for 2022 and 4.6% in 2023.

Source: Company Websites

According to Insider Intelligence, China will weigh heavily on 2023 numbers as the second-biggest digital ad market is expected to “post its lowest digital ad growth on record” due to “tougher regulations and economic headwinds.”

According to IAB, the U.S. advertisement market is expected to grow by 5.9% in 2023, which is lower than the 9% growth seen in 2022. The slowdown in growth is the direct result of the challenging macro environment.

On a brighter note, the CTV market is expected to grow 14.4% in 2023 and will grow faster than the overall advertisement market. They forecast Linear TV spending to see a drop of (6.3%). Across the advertising channels, digital video, including CTV, is expected to have the highest share of 22.4%, up from 19.3% in 2022.

There are also positive comments from other ad-tech companies on CTV. Hunain Khan, Director, Programmatic CTV supply at Xandr said, “2023 marks a new age of CTV, due to the increased amount of available premium inventory through AVOD platforms.”

Similarly, Hitesh Bhat, Director, CTV/OTT, EMEA at PubMatic said, “2023 will be an interesting year for CTV in Europe, but I’m avoiding “the year of CTV’ hyperbole. The ad-funded opportunity will grow significantly with the entrance of huge players such as Netflix, Disney+, Paramount+ and the combined HBO/Discovery+ offering. I think Netflix and Disney will be careful in terms of ad loads, so as not to annoy viewers who are still also subscribers.

The Dentsu ad spending report forecasts that global advertising spending in 2023 to increase by 3.8% YoY to $740.9 billion. It is lower than the 8% expected growth for 2022 and the 19.6% growth reported in 2021. The forecasts have been slashed from the July report, which projected a growth of 5.4% for 2023. Some of the reasons mentioned in the report for the slowdown include rising inflation, interest rates, recessions, and political uncertainty. The report suggests that if we exclude the media price inflation, ad spending is forecasted to drop (0.6%) in 2023.

The Americas region is expected to grow 3.7% YoY to $339.1 billion, the EMEA region to grow 3.8% YoY to $156.7 billion, and Asia Pacific is forecasted to grow 4% to $245.1 billion.

Digital ad spending is expected to grow 7.2% YoY to $422.8 billion. It is down from 13.7% expected growth in 2022. Digital ad spending accounted for 57.1% of all advertising spending in 2023. The share is expected to increase to 59.5% in 2025.

According to Insider Intelligence, digital ad spending is expected to grow 10.5% in 2023 from the expected 8.6% in 2022, both of these estimates reflect downward revisions of 2.6% and 7%, respectively.

The CMO survey done in September 2022 showed that the marketing spending increased by 10.4% in the previous one year for marketers. However, they predict that the growth will slow down in the next one year to 8.8% and will start trending toward the pre-Covid level of 5.8%.

A majority of the companies say that the inflationary pressures are decreasing marketing spending levels. Marketing leaders in large companies report marketing spending reduction due to inflation and on the other hand, marketers in the smallest companies report an increase in marketing spending. The survey also suggests that the marketing expenses as a percentage of total revenue have reverted to the pre-Covid levels, as seen in the below chart. It reached a high of 13.2% in February 2021 to 8.7% as per the September 2022 survey.

Source: CMO SEPTEMBER 2022 SURVEY

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Google May Be the Stronger Ad-Tech Company in 2023

According to analyst consensus, Google is expected to generate $168.44 billion in net digital ad revenues worldwide this year, down from Q1 expectation of $174.81 billion. By 2024, Google’s ad business will reach $201.05 billion—or 2.8% below the Q1 expectation.

“Google has an edge over its other ad-reliant competitors in an economic downturn, as advertisers facing budget cuts typically prioritize lower-funnel channels with higher ROI like search,” said Evelyn Mitchell, analyst at Insider Intelligence. “Search has also retained full functionality in the wake of Apple’s privacy changes. Search ads are served in response to a user query and don’t usually leverage data about that user, so they’re less affected when iOS users opt out of being tracked. Meanwhile, social media advertising relies more heavily on consumer data.”

Source: EMARKETER/INSIDER INTELLIGENCE, NOVEMBER 2021

Source: EMARKETER/INSIDER INTELLIGENCE, APRIL 2022

The above two studies from Insider Intelligence show that Facebook and Instagram have the highest number of social media network users in the US. However, these platforms have lost the top spots in terms of engagement as TikTok and YouTube has the highest daily time spent by the users. Due to higher engagement, these platforms are likely to do better for social media advertising makes more sense.

On that note, Insider Intelligence expects Meta to generate $112.68 billion in digital ad revenue for the year 2022, representing a YoY drop of 2%, which is down significantly from the Q1 forecast of $129.16 billion. The firm has lowered the forecast for Meta through 2024 by nearly 20% citing Instagram’s ad revenue to grow by 2.6% YoY to $43.28 billion compared to a 50.2% growth in 2021. The estimate is significantly lower than the Q1 forecast of $54.16 billion. They expect Instagram revenue to reach $59.61 billion by 2024, which is more than 27% lower than the Q1 projection.

Below, Lead Tech Analyst Beth Kindig covers why Meta’s lack of access to third-party data spells trouble for its future growth. This webinar was recorded in April of 2022 yet is still relevant today.

Snapchat ad revenues are also negatively impacted by the economic slowdown. Insider Intelligence has slashed the 2022 ad revenue estimates by 18.3% from their Q1 forecast. They have also reduced the 2024 ad revenue by 33.6% from their Q1 estimates.

The TikTok Threat is Real

Insider Intelligence expects TikTok’s global ad revenue in 2022 to grow 155% YoY to $9.89 billion, below its Q1 estimates of $11.64 billion. They expect TikTok ad revenue to grow 36.7% in the next two years to reach $18.49 billion. However, the 2024 forecast has been by lowered by 21.6% from their Q1 estimates. Jasmine Enberg, the principal analyst at Insider Intelligence, said, “TikTok has transformed from an experimental play to a must-buy for many advertisers,” She further said, “But TikTok isn’t immune to the macroeconomic challenges causing advertisers to trim their overall digital ad budgets. Meanwhile, growing anti-TikTok sentiment among media executives and renewed calls by government officials to ban the platform are causing some advertisers to be more cautious about their spending there.”

According to the Sensor Tower report, social channels accounted for 61% of US digital ad spending in Q3 2022. The US digital ad spending is strong as it grew 5% quarter-over-quarter to $23 billion. Facebook leads the top advertisers in the United States. However, TikTok had the highest growth as it grew 29% QoQ and is a threat to other social media channels.

Disney+ increased its advertising spend in TikTok from $3 million in Q1 2022 to $17.9 million in Q3 2022. TikTok has been successful in being popular among the younger generation audience which has attracted marketers to its platform. As per Omdia research TikTok’s ad revenue is expected to exceed Meta and YouTube’s total video ad revenues by 2027.

Other ad-tech trends to watch for 2023

First-party data ownership is gaining popularity. The data is more reliable even though it might be smaller than the third-party data. The quality of the first-party data is superior and helps better understand the customer’s needs. Contextual targeting is another trend to watch. Contextual targeting means that users will see ads relevant to the topic you are watching or reading. Previously, you used to get ads based on browsing history. Contextual targeting might increase the chances of increasing the return on investment as the ads are relevant to the content. There could also be increased use of AI/ML tools in contextual targeting.

Conclusion

The overall advertising market is expected to slow down in 2023. Some of the crucial reasons are rising interest rates, inflation, and slowing global growth. Even though the estimates have been reduced, the digital ad market is expected to fare better than the broader advertising market.

We believe there will be a handful of winners despite more headwinds in 2023 and we cover these winners for our premium research site. However, until ad budgets resume growth, the industry at large is likely to be volatile in stock price.

Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.