Investors are learning that online advertising stocks may be just as vulnerable as old-school media companies amid a looming potential economic downturn.
Concerns over the sector have grown since Snap Inc. slashed its forecast in May, warning that a weaker economic outlook was weighing on its ad business. That sparked a selloff of more than 40 per cent, its biggest one-day drop ever, and the stock is now down about 70 per cent in 2022. The parent of Snapchat releases second-quarter results Thursday after the market closes.
While the industry has benefited from the long-term tailwind of ad spending shifting to digital from print and broadcast, the growth in publicity budgets is likely to take a hit as business gets tougher. In addition, higher rates have hurt the valuations of companies that are priced based on expected growth far out in the future, while social-media stocks also have been struggling against a changed privacy policy at Apple Inc. that has diminished their ability to target ads.
Industry watchers already are cutting their forecasts for this year. GroupM, a media investment company, expects ad revenue growth of 8.4 per cent, excluding US political ads. That’s slower than the 24.3 per cent pace set in 2021, and down from the 9.7 per cent that GroupM expected for 2022 at the end of last year.
Kahn singled out Trade Desk as a stock that still looks risky despite strong long-term prospects; it trades at almost 45 times estimated earnings. “Even though it has beaten expectations for several straight quarters, that’s still a premium valuation for a bear market,” he said.
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