There's no sugarcoating it: 2022 wreaked absolute havoc on digital advertising, and companies in the ad tech business were generally throttled. Why? It's well documented that marketing funds can be dialed back or ramped up on short notice, much more easily than other line items in the budget. As a result, in times of economic uncertainty, advertising historically takes a hit -- and last year was no different.
This year, however, has seen some of the macroeconomic clouds lifting. Inflation is easing and the Federal Reserve may be near the end of its campaign of hiking interest rates. This combination of factors suggests the worst may be over. Furthermore, the recent financial performance of two online advertising stalwarts -- Meta Platforms (META 0.43%) and Alphabet's (GOOGL 10.22%) (GOOG 9.96%) Google -- provided some insight into what's happening in the industry.
The results should be of keen interest to investors in two other high-profile ad tech stocks -- namely, Roku (ROKU -10.29%) and The Trade Desk (TTD 1.67%). Let's take a look at what's happening in the industry and what it might tell us about the future.
Image source: Getty Images.
A big week in advertising
Last week, Alphabet and Meta Platforms delivered their respective third-quarter financial reports, which provided a peek behind the curtain into the state of digital advertising.
Meta generated revenue of $34.1 billion, up 23% year over year, resulting in earnings per share (EPS) of $4.39, which soared 168%. It's worth noting that both metrics exceeded analysts' consensus estimates, which called for revenue of $31.2 billion and EPS of $3.04. This marks the third consecutive quarter of accelerating ad revenue growth, suggesting that digital advertising has begun its long-awaited rebound.
Alphabet's results were similarly upbeat. Revenue of $76.7 billion climbed 11% year over year, resulting in EPS of $1.55, which jumped 46%. Singling out its digital advertising, Google's revenue of $59.6 billion increased 9%. Alphabet also exceeded expectations by a comfortable margin; analysts' consensus estimates called for revenue of $74.7 billion and EPS of $1.36. It also marks the third successive quarter of year-over-year and sequential increases, which adds weight to the theory that businesses are beginning to loosen their purse strings and resume ad spending.
These results seem to suggest a recovery in digital advertising. So what does that mean for The Trade Desk and Roku?
The Trade Desk should continue to steal market share
While the decline in ad spending hit all digital advertisers, The Trade Desk actually used the challenging environment to improve its position in an increasingly competitive industry. During the downturn, it released an upgraded version of its programmatic advertising platform. Additionally, The Trade Desk set about reminding marketers of its value proposition: reaching the right customer, at the right time, with the right ad. Advertisers needed more bang for their buck and increasingly turned to The Trade Desk, which provided more return on their investment.
During The Trade Desk's second-quarter earnings call, CEO Jeff Green stated (emphasis added), "Our relative outperformance over the last few quarters means we have gained more market share than in any other period in our company's history." That was backed up by the company's performance, as year-over-year revenue growth has outpaced both Meta Platforms and Google over the past five consecutive quarters.
A recovery in the digital advertising market will only benefit The Trade Desk. If history is any indicator -- and it frequently is -- The Trade Desk's third-quarter growth will likely outpace that of its two larger rivals.
Roku's growth should accelerate
Like The Trade Desk, Roku used the downturn to strengthen its business and was largely successful, though you wouldn't know that by the swooning stock price, which remains 74% below its pandemic-era high. Yet going back to the start of the downturn, revenue growth from Roku's platform segment -- primarily made up of the digital advertising shown on its platform -- has outpaced both Meta Platforms and Alphabet in every quarter but one.
This suggests that it, too, has been gaining market share at the expense of its rivals. It's important to note this isn't an apples-to-apples comparison. Much of Roku's advertising revenue comes courtesy of the free, ad-supported television (FAST) apps streaming on its platform, while advertising for Meta Platforms and Google comes from social media and online search, respectively. That said, each company would be affected by general trends within the overall digital advertising industry.
Furthermore, with more than 73 million active accounts, Roku is a platform advertisers can't afford to ignore. That's particularly true given the company's growing presence in the connected TV market. The Roku operating system (OS) is the top-selling smart TV OS in the U.S., Canada, and Mexico.
That said, if Roku's growth holds true to form, its rate of expansion should exceed those of its two larger rivals, suggesting year-over-year growth could come in at 23% or more.
The fine print
As in life, there are no guarantees in investing. That said, the trajectory of the digital advertising market is on the upswing. Both The Trade Desk and Roku have a history of generating growth that outpaces their rivals, so there's every reason to believe that will continue.
Investors should keep an eye out for Roku's results after the market closes on Wednesday, Nov. 1, while The Trade Desk reports on Thursday, Nov. 9.
