What happened
Shares of many advertising-technology (adtech) stocks got crushed this week, including demand-side platforms (DSP) The Trade Desk (TTD 3.35%) and Criteo (CRTO 3.79%), and supply-side platforms (SSP) Magnite (MGNI 2.94%) and PubMatic (PUBM 2.19%). As of market close on Thursday, these four stocks were down 10%, 10%, 17%, and 13%, respectively, for the week.
These stocks were down due, in part, to a deal between Netflix and Microsoft. Investors had expected one of these other ad-tech stocks to be the beneficiary of Netflix's move toward ads. Analysts also weighed in on a couple of these stocks, adding more downward pressure. But a couple of these companies actually had some good news this week that was overshadowed by the Netflix news, which we'll look at now.
So what
Netflix wasn't the only streaming company in the news this week. Disney also made an adtech deal with The Trade Desk, which is why The Trade Desk stock wasn't down as much as some of these other stocks this week.
The deal integrates Disney's first-party data with The Trade Desk's Unified ID 2.0, which is meant to be a replacement for the third-party cookie. It's a good deal for Disney because it will help improve the quality of its ad-targeting capabilities, providing better outcomes for advertisers. And it's a good deal for The Trade Desk because Disney is one of the largest media companies in the world.
For some, Disney's deal with The Trade Desk was bad news for Magnite, which is why Magnite was down a little sharper than some of these other stocks this week. Magnite and The Trade Desk work on opposite sides of the ad-tech coin, with Magnite being the SSP that Disney uses. But The Trade Desk appeared to be moving toward Magnite's territory with its new Disney deal.
Truist analyst Matthew Thornton disagrees. According to a note from Thornton this week, Disney's deal with The Trade Desk complements Disney's deal with Magnite and isn't a replacement. For this reason, he kept his buy rating for Magnite stock in place, according to The Fly. And he reiterated his price target of $15 per share -- roughly double where the stock trades right now.
Some analysts are choosing not to follow Thornton's lead with price targets. On Thursday, Craig-Hallum analyst Jason Kreyer reduced their price target for Magnite by 36% to $16 per share, according to The Fly. And the price-target reduction is partly due to Netflix choosing to partner with Microsoft on ads. And this caused the stock to drop more.
To Kreyer's point, Netflix is the first mover in the streaming-service space and was able to amass more than 200 million paying subscribers worldwide. But with its growth now challenged, it's turning to an ad-supported subscription tier in hopes of gaining and retaining more users. Given the size of Netflix, it's an enviable prize for any advertising player.
On Wednesday, Netflix officially named Microsoft its partner in advertising, to the shock of many. To be clear, Microsoft is an advertising powerhouse. As of March, it had generated over $10 billion in trailing-12-month ad revenue. However, it's not a big player in connected-TV (CTV), whereas companies like The Trade Desk, Magnite, and PubMatic are.
Stephens analyst Nicholas Zangler doesn't see much hope for these other companies to benefit from Netflix's move toward ads now. According to The Fly, Zangler believes Microsoft will be handling all of Netflix's advertising needs, functioning as both a DSP and SSP, leaving everyone else out. And that's why The Trade Desk, Magnite, and PubMatic stocks were down this week.
Now what
We've zoomed in on deals with Disney and Netflix. But zooming out, nobody wants to own adtech stocks these days. Consider Criteo. It was never really in play for a deal with Netflix -- it's not known as a CTV player. That said, it's a solid business. In the latest quarter, revenue was only down 1% year over year in constant currency and free cash flow was up 9%.
I admit these numbers could be better. However, Criteo stock trades at just 1.2 times its book value, which reflects quite a bit of pessimism from the market.
Berenberg analyst Sarah Simon lamented Criteo's cheap valuation in a letter to investors on Thursday, calling it "woefully undervalued," according to The Fly. But Criteo isn't alone. The Trade Desk, Magnite, and PubMatic are also trading at multiyear low valuation metrics.
Inflationary environments can be difficult for advertisers. And since inflation is its highest in 40 years, investors are worried about these companies. In short, discretionary spending could get squeezed as prices soar. And if consumers cut back, advertising budgets will get reduced, to the detriment of adtech stocks.
Adtech stocks could be a volatile investment, as long as inflation is high and the economy struggles. However, over the long term, the trend seems to be away from analog and toward digital, to the adtech-industry's benefit.
Therefore, I believe this year could be a great time to build positions in the best adtech companies through dollar-cost averaging, taking advantage of "woefully undervalued" stocks while keeping your sights set on the individual businesses and the long-term secular-growth trend.
