Shares of a wide number of digital advertising stocks took it on the chin Friday. Programmatic advertiser PubMatic (NASDAQ:PUBM) was down as much as 14.3% on Friday, sell-side platform Magnite (NASDAQ:MGNI) was off by 13.8%, online advertising technology specialist Criteo (NASDAQ:CRTO) was down as much as 10.5%, and digital advertising kingpin The Trade Desk (NASDAQ:TTD) was off as much as 9.6%. While each of the stocks recovered slightly, the quartet ended the session down 10.2%, 13.6%, 10.3%, and 8.8% respectively.
The catalyst that sent ad-tech stocks plunging was dismal results from social media company Snap (NYSE:SNAP), and an understandable but tenuous connection.
Snap's stock sold off sharply after the company posted weaker-than-expected results and soft fourth-quarter guidance. Investors were also spooked by management's commentary as to the cause. During the earnings conference call, CEO Evan Spiegel blamed the weakness squarely on Apple (NASDAQ:AAPL), saying, "Our advertising business was disrupted by changes to iOS and tracking that were broadly rolled out by Apple in June and July ... making it more difficult for our advertising partners to measure and manage their ad campaigns for iOS."
He went on to say that the changes wrought by the tech giant "upended many of the industry norms and advertiser behaviors that were built on IDFA, Apple's unique device identifier for advertising over the past decade." Finally, Spiegel charged that Apple's ad measurement solution -- SKAdNetwork or Scan -- was "unreliable as a stand-alone measurement solution."
So what does this all have to do with The Trade Desk, Magnite, and other ad-tech stocks? Investors were clearly concerned that the "Apple effect" would bleed over into digital advertising in general. Further, a number of analyst's raised the specter that this issue could drag on for several quarters.
Piper Sandler analyst Thomas Cook summed it up nicely in a note to clients, saying that Snap's results suggest "a more challenging earnings season" particularly for those with exposure to direct response advertising. He went further, saying the changes wrought by Apple "raise the level of uncertainty and may worsen before workarounds take hold."
This was enough for investors to sell first and ask questions later.
While the knee-jerk reaction is certainly understandable, Apple doesn't represent as much of a threat to these ad-tech companies as today's sell-off might suggest.
The Trade Desk CEO Jeff Green addressed the issue late last year, pointing out that overall, less than 10% of the advertising spend on its platform is "reliant in IDFA," saying it "doesn't have a material impact on our business." He went on to say that The Trade Desk parses roughly 12 million ads per second, and roughly 1 million of those are dependent on IDFA.
Part of the reason for his confidence is the work The Trade Desk has done on its Unified ID 2.0 initiative, the company's open-source ad-tracking platform that doesn't rely on personally identifiable information, IDFA, or ad-tracking cookies. During the Q4 2019 earnings call, Green stated:
Advertisers know that we can help them do their modeling work with a limited amount of data or a vast amount of data. If we operate in a world with less data, we're darn good at that. Our whole system is built around making objective choices with limited data.
It's also important to remember that Magnite, PubMatic, and Criteo won't be any worse off than The Trade Desk -- as each of these ad-tech companies works with the company and has adopted its Unified ID 2.0 platform.
There's little doubt that digital advertising is in the midst of a paradigm shift and ad-tech companies could feel a drag on their results over the short term.
That said, it appears that today's sell-off was something of an overreaction; and for investors with a sufficient time horizon, today's decline appears to represent an opportunity to buy quality stocks at a discounted price.