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1 Advertising Stock With Huge Upside Potential

By Matthew Frankel, CFP® - Updated Jun 22, 2021 at 3:47PM

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Don't think digital media advertising is the only smart way to invest.

2020 was a rough year for the advertising industry, and that's especially true for Outfront Media (OUT 0.37%), which specializes in billboards and transit system advertising. However, in this Fool Live video clip, recorded on June 3, contributor Matt Frankel, CFP, discusses why this is one advertising stock investors should definitely keep on their radar. 

Matt Frankel: Outfront Media has been around since 1938 in one form or another. It's been passed around a subsidiary of a lot of bigger companies. At various points in its history, it's been subsidiaries of Viacom, 3M, CBS, and finally, it was spun out from CBS in 2014 in its current form. So there's two big sides to this business. There is billboard advertising like when you're driving down a highway, you see a billboard on the side of the road. A lot of those are Outfront Media's billboards, and then there's transit system advertising. Outfront has a big presence in the New York city subway, for example, if you've seen those, the big ads on the wall, those are Outfront ads. In the D.C. Metro, in Los Angeles transit system. A lot of big transit systems use Outfront for advertising.

It's classified as a real estate investment trust, even though it doesn't own the subway. A lot of people don't think of it as real estate, but they are real estate in the sense that they own advertising space and then lease those out to tenants. So it's somewhat of a real estate business. A couple of things. Outfront Media's revenue got absolutely crushed over the past year. When nobody is driving on roads and nobody's taking the subway, why would you spend your money from a company's perspective to get your message in front of those audiences?

The billboard advertising business has done OK. Year over year in the first quarter, revenue was down 70% in the billboard side of the business. Transit system revenue has gotten absolutely crushed. No one was working in offices up until very recently, almost nobody was working in offices. Nobody was taking the subway, nobody was taking the bus. The transit system area of the business was down 67% year over year in the first quarter. A lot of reopening potential as things start to get back to normal. Outdoor advertising is a highly undervalued form of advertising by consumers, especially with all the high-tech forms of advertising we're seeing pop into the market.

When you talk about advertising investments these days, most people focus on things like streaming ads, the ads you see on YouTube videos, things to that effect. The out-of-home advertising actually services a nice complement to those. A lot of companies, big companies such as Apple, Facebook, Square invest heavily in these out-of-home advertising. They're all big Outfront customers, and for good reason. These are ads that have some inherent competitive advantages over other forms of advertising.

When you look at some of the legacy forms like print advertising. If you have a magazine add, you could flip to the next page, you don't have to read the ad. If you're sitting on a subway across an ad, you are going to read it. It's a more effective way to get your message over to customers, and you can click off a YouTube ad. You could choose to look at something else while the five seconds of ad are playing before you can click it away. That's not the case with outdoor advertising. Outfront has about a 20% share of this market, and there's a huge growth opportunity here. They grow through incremental acquisitions.

But outdoor advertising is really in the early stages of a digital transformation. You probably noticed a lot of the billboards by your house are digital now, not pieces of paper. Only about 20% of Outfront's advertising spaces are digital in nature. Digital ads, digital billboards, digital transit system ads, things like that, bring in four to six times the amount of revenue as a static billboard. Not only that, but the gross margins are much better. Digital ads have an 85% gross margin compared to 70% for static. So they're more profitable, bring in more revenue, and it's only about one-fifth of the company's total advertising spaces right now.

The stock is still significantly below where it was before the pandemic, despite this huge amount of potential. With the 5G roll out, there's a whole number of potential there. I don't want to get too technical, but with 5G technology, the cell towers, and then the nodes have to be a lot closer together. A lot of smaller nodes a lot closer together to build the network. Outfront has started exploring pretty attaching these to its existing advertising faces. Very capital-light way of adding revenue to their existing infrastructure. I'm a big fan of Outfront. I'm a big investor in the company. It's one that I am watching very closely in the next year so as the world starts to get back to normal, I think you'll get to see a lot of companies. In 2021, by the way, outdoor advertising is supposed to be the fastest growing type of advertising in the market, including digital. I'm curious to see how it unfolds for the next year or so.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Matthew Frankel, CFP owns shares of Apple, Outfront Media, and Square and has the following options: short February 2021 $140 calls on Apple and short May 2021 $140 calls on Apple. The Motley Fool owns shares of and recommends Apple, Facebook, Square, and Veeva Systems. The Motley Fool recommends 3M and Outfront Media and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Outfront Media Inc. Stock Quote
Outfront Media Inc.
$18.88 (0.37%) $0.07
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
$168.53 (-1.01%) $-1.72
Apple Inc. Stock Quote
Apple Inc.
$164.92 (0.03%) $0.05
3M Company Stock Quote
3M Company
$147.84 (-0.43%) $0.64
Block, Inc. Stock Quote
Block, Inc.
$81.13 (-5.11%) $-4.37

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