The digital advertising industry has gotten clobbered over the last year.
A combination of macroeconomic headwinds and difficult comparisons with the pandemic boom led to a crash in digital advertising stock prices, and giants like Alphabet and Meta Platforms both reported revenue declines in their advertising businesses in the fourth quarter, showing the challenges haven't gone away.
However, that sell-off has created some opportunities. Advertising is a cyclical business, and it will recover when brands feel more confident about the economy and consumer spending. When that happens, these two ad tech stocks could surge.
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1. Roku
Roku (ROKU 0.15%) was one of the biggest losers in the advertising sector last year. Shares of the leading streaming distribution platform plunged by 82% as its revenue growth ground to a halt and the company posted wide losses as it stepped up investments in the business.
However, 2023 is off to a better start. The stock has jumped by 74% year to date, and Roku's fourth-quarter earnings report earned cheers from Wall Street.
The results themselves weren't particularly impressive as revenue growth was flat, but that was actually much better than expectations. Roku, which reported a $250 million adjusted EBITDA loss in the quarter, forecast that it would deliver an adjusted EBITDA profit in 2024 as the company commits to controlling costs and expects revenue to improve once the ad market recovers.
While the ad market is still challenged, Roku continues to grow its user base. Its active accounts jumped by 16% over the last year to 70 million, and streaming hours rose by 23% to 23.9 billion.
Additionally, the company continues to gain market share and grow internationally, expanding its market opportunity.
Currently, the stock trades at a price-to-sales ratio just above 3, and its market cap under $10 billion shows it has room to grow as more of the linear television audience shifts to streaming. With its sights set on profitability, the stock could have a lot of upside ahead once ad demand rebounds.
2. Magnite
Magnite (MGNI 2.94%) is a supply side ad tech platform, which means it offers web publishers tools to optimize their ad inventory. It achieved its current form in recent years through a series of mergers, and it's now best known for its focus on connected TV, or ad-supported streaming, so it's exposed to many of the same tailwinds that are driving Roku's growth.
The company hasn't yet reported its fourth-quarter results, but in its third quarter, connected TV provided 44% of its revenue, excluding traffic acquisition costs. It also drove much of the company's top-line growth, as connected TV revenue was up 29% to $55.8 million in the quarter, compared to 11% growth for the overall company.
That focus on connected TV should pay off as ad-based streaming platforms have multiplied in the last couple of years. Netflix and Disney just launched ad-based tiers. Warner Bros. Discovery is preparing to combine HBOMax and Discovery+ into a single streaming service, which will also be offered with an ad-supported tier, and newer services like Paramount+ and Comcast's Peacock have also gotten into the mix.
Streaming services are increasingly focused on profitability rather than growth, which makes it even more likely that they'll turn to ad tech platforms like Magnite to optimize their ad businesses.
Magnite is prepared for that moment. It just launched its next-generation connected TV and over-the-top media monetization platform, Magnite Streaming. It's a single platform that unites tools from Magnite CTV and SpotX, a company it acquired in 2021. In many ways, the new product seems to be the end goal of that acquisition.
Its customers include Disney advertising, Fox Corp., Warner Bros. Discovery, AMC Networks, and others. As audiences shift more of their viewing from linear TV to streaming, advertisers will follow and Magnite will benefit.
Currently, the stock looks cheap considering its growth potential in connected TV, trading at 20 times earnings. While growth could be sluggish in 2023, the stock should wake up once the digital ad market returns to growth.
