Marketers are trimming their ad budgets, and that's bad news for a lot of companies heavily reliant on advertising revenue.
Interactive Advertising Bureau (IAB) expects ad-spend growth to decline from 9% in 2022 to 5.9% in 2023. Magna expects growth to slow from 6.6% to 4.8%.
But not all advertising companies are the same. Some stand above the rest in this difficult environment. Here's why The Trade Desk (TTD 2.57%), Alphabet (GOOG 0.21%) (GOOGL 0.41%), and Spotify (SPOT 2.23%) are worth a closer look from investors.
The Trade Desk
The fastest-growing segment of digital advertising, by far, is connected TV.
IAB expects connected-TV ad spend to increase 14.4% next year. When you combine connected TV with all digital-video advertising (think YouTube), it's expected to account for 22.4% of all digital ad spend in 2023, up from 19.3% this year.
The Trade Desk is an adtech company that offers a platform for marketers to purchase and manage advertising campaigns, and it's built a significant presence in the connected-TV and digital-video market. By partnering with key video services, The Trade Desk has access to valuable inventory. In summer 2022, The Trade Desk finalized a deal with Disney to sell ads for Hulu, Disney+, and ESPN+. For reference, Hulu is one of the biggest sources of connected-TV ad sales.
Importantly, The Trade Desk is showing strength in the market while its competition weakens. When Roku announced its third-quarter results, not only did it post disappointing growth in its platform segment (consisting primarily of advertising), but it forecast negative growth for Q4. Meanwhile, The Trade Desk showed signs of slowing but still expects to grow 24% year over year in Q4.
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Key Data Points
Alphabet
Paid search advertising has a big advantage in today's environment where there's a greater focus on privacy protections.
Search engines have the advantage of being able to target advertisements based on exactly what users are looking for, when they're looking for it. That insulates search engines from needing to be able to track users across apps and the web, which has become increasingly difficult due to software updates from Apple and government regulations in Europe.
IAB expects the amount of money flowing into search ads to climb 8.9% in 2023, with the share of digital ad spend climbing to 16% of the total.
Google is the leader in online search, and that title isn't getting taken away from it anytime soon. The company's search advertising business remains a source of strength even amid the market downturn. It propped up Google's total advertising revenue, which includes YouTube and its network advertising, in Q3, while the rest of the segment declined in revenue.
Importantly, IAB expects travel, restaurants, and financial services businesses to all grow ad spend faster than the overall market. Those are three areas where Google excels in advertising. In fact, management noted a pullback in financial services (like cryptocurrency firms) advertising in Q3 as one reason for the slowdown in revenue growth.
Investors should expect Alphabet's revenue growth to reaccelerate in 2023.
Spotify
Podcasts continue to grow in popularity, and advertisers are finding good returns by advertising on the format. IAB expects podcast ad spend to grow 8.1% in 2023.
Spotify has invested heavily in the podcast space, buying both content and technology for production, distribution, and ad sales. The company sells podcast advertising through the Spotify Audience Network, which leverages listener data and context to target advertisements.
Spotify's advertising business is growing relatively quickly. Its ad-supported revenue, which includes music and podcast listeners, grew 19% year over year in Q3. What's more, podcasts are the driving force behind that growth.
That's in large part because Spotify is not only adept at selling ads, but it's also able to expand the podcast-listener market by integrating podcasts with its music platform. That's led to its becoming one of the largest podcast-listening platforms in the world despite only entering the space a few years ago.
As Spotify curbs its podcast acquisitions and investments while growing podcast ad revenue, the segment should start producing significant profits for the company. While currently a drag on gross profits, management expects the long-term margin profile of its podcast business to exceed the music business, which generated around 28.5% gross profit margin in Q1 this year. Podcasts could be a 40% to 50% gross margin business, management says.
Digital advertising is still a growing industry
Even amid the macroeconomic uncertainty, digital advertising will continue to grow. While that growth will moderate, the long-term trend is for digital to displace traditional TV, radio, and newspaper advertising. Not every company will be a winner, but the above three are well positioned to succeed in the near future and the long term.
