As the internet becomes a bigger part of our daily lives, the digital advertising industry benefits. More users, usage, and data create a lot of opportunities worldwide to target individuals with ads. According to Grand View Research, revenue in the market is set to eclipse $1.4 trillion by 2030, so it's a good place to look for buying opportunities.
Luckily for investors, it's not necessary to pick a single winner. There are already some obvious leaders dominating the industry. I think it's a smart idea to at least consider buying shares of all of them for some exposure to this broad secular trend.
The undisputed ad leaders
When talking about this industry, I'm sure Alphabet (GOOGL 1.46%) (GOOG 1.51%) is the first business that comes to mind. More than 80% of the tech trailblazer's revenue in 2022 came from digital advertising. When you own some of the most popular websites on the planet in google.com and youtube.com, there is naturally a massive amount of attention that can be monetized.
Meta Platforms (META 3.93%) is another dominant enterprise in the internet economy. Its social media apps have over 3 billion daily active users, a gargantuan sum. Meta generates virtually all of its revenue from selling advertisements.
It's an accurate statement to say that Alphabet and Meta, which combined control 47% of the U.S. digital advertising market, helped spearhead the adoption of the internet, while also essentially creating the digital ad industry. And they have done this while dealing with the shift from PCs to mobile devices. The fact that consumers use their smartphones so much, leads to ample advertising opportunities.
Mark Zuckerberg, Meta's founder and CEO, is trying to position his company to be a leader in the metaverse, which he believes can be the next major computing platform. With the potential for augmented and virtual reality, Meta could drive even greater ad revenue in the decade ahead.
While these are two of the most financially sound businesses out there, investors were probably recently discouraged by the cyclicality of the digital advertising market. Both Alphabet and Meta have seen revenue gains slow due to macro headwinds.
Nonetheless, it's still smart to consider owning them. Alphabet shares trade at less than 25 times forward earnings, with Meta trades at less than 24 times. These valuations look like attractive entry points for prospective investors looking to put money to work in the digital ad space.
Image source: Getty Images.
Don't forget these tech giants
Besides the two clear leaders in the industry, investors can consider two other tech behemoths that are starting to become more important players when it comes to digital advertising.
Take e-commerce and cloud computing giant Amazon (NASDAQ: AMZN). Its shopping site had 3.8 billion visitors in September. Management was smart to realize that this insane amount of web traffic could be monetized, so selling ads was the strategic move. In the latest quarter (Q2 2023, ended June 30), Amazon generated $10.7 billion in revenue from digital ads, up 22% year over year. This puts it behind only Alphabet and Meta in the industry domestically.
As of this writing, Amazon's stock is trading at a price-to-sales multiple of 2.5. That's below the trailing five-year average, so investors would be wise to look into buying shares.
Apple (NASDAQ: AAPL), which still makes about half of its revenue from a single product (the iPhone), is estimated to have made $4.7 billion from digital ads in 2022. It's not difficult to see how the company can continue growing this segment.
According to CFO Luca Maestri, Apple has more than 2 billion active devices around the world. This creates many opportunities to serve up ads, like in the App Store. And with these consumers leaning toward the higher end of the income spectrum, I'm sure marketing executives would love to target them with ads.
Compared to Alphabet, Meta, and Amazon, Apple shares are on the expensive side. And for a mature company that might not see the same growth it did in the past, this could be a reason not to buy. But it still sells some of the most popular desktop and mobile hardware and software, a fact that could give investors some encouragement.
