Thanks to the rise of the internet and the prevalence of smartphones, the way that companies can market toward a broader audience has shifted away from print, direct mail, radio, and TV to various forms of media on PC, mobile, and other platforms. In fact, the digital advertising market, as it's called, is expected to become a $1.5 trillion market on a global basis by 2030. This secular trend is a nice place to look for stock picks.
Astute investors would quickly realize that they don't need to single out a potential winner in the digital ad market. It's obvious who the leaders are, which can all make for worthy portfolio additions right now. The ongoing growth of the internet should bode well for their prospects. Let's take a closer look.
Two dominant digital ad giants
Of Alphabet's $283 billion in revenue in 2022, about 80% came from advertising efforts. With google.com and youtube.com being the two most visited websites in the world, the company literally created the digital advertising industry thanks to the massive number of eyeballs that go there.
There's also Meta Platforms and its more than 3 billion daily active users across Facebook, Instagram, WhatsApp, and Messenger. Just about all of its $116 billion in revenue last year was derived from digital ad sales.
Both of these dominant businesses, which combined control 53% of the digital ad market, deserve more credit because they successfully navigated the shift from personal computers to mobile devices. Less time is being spent on PCs and tablets, with smartphones taking the attention of consumers. In the U.S., the average American spends four and a half hours per day on their phones. This creates lots of "digital real estate" to display ads in a variety of ways, whether in text, audio, or video form.
Augmented reality (AR), virtual reality (VR), and the metaverse could all be parts of the main computing platform of the future. At least this is what Meta founder and CEO Mark Zuckerberg believes. If the metaverse does gain widespread adoption over the next decade, then Meta would be in a prime position to present ads in new and immersive ways.
Image source: Getty Images.
Two up-and-coming industry heavyweights
While the leadership teams at Alphabet and Meta knew in the early days that their key method of monetization would be to sell advertisements, Amazon took a different route to the party. Many investors know that Amazon's core operating line has been its e-commerce site, which attracted a whopping 2.8 billion visits in the month of July. Being one of the most popular websites meant that Amazon could eventually monetize this attention, so it started selling ads that consumers would see when shopping.
In the 2023 second quarter (ended June 30), the business generated $10.7 billion from advertising, up 22% year over year. That rate of growth exceeded Amazon Web Services' 12% gain.
Apple followed a similar path to Amazon. With the iPhone, which represented 49% of companywide sales in the fiscal 2023 third quarter (ended July 1), Apple essentially controls the platform that consumers use to access the internet. The growth of services developed specifically for its hardware, in particular, has allowed the business to start displaying ads in the App Store or on the News service. It's estimated that ads made Apple nearly $4 billion in revenue in 2021.
Is scale an advantage?
All four of these internet businesses have huge market caps, with massive revenue figures and global reach. So naturally, investors might think that their upside is limited. This assumption might have some truth to it, but it's worth pointing out that these companies should still register solid growth for several years going forward, as they are all aiming to take a growing share of an expanding digital ad market.
Additionally, Alphabet, Meta, Amazon, and Apple can use their scale as an advantage. They all have large user bases that help them collect ridiculous amounts of data that marketing teams salivate over. As they get even bigger, their ability to target specific audiences and generate greater return on ad spending will only improve.
This makes owning all four stocks an effective way of gaining exposure to the digital advertising industry.
