The rise of the internet has completely changed the economy. Moreover, the growth of everything digital has altered consumer behavior. We spend a good chunk of our time interacting with online services.
From an investment angle, this has implications for how you position your portfolio. An area to look at that has benefited from secular growth thanks to the advent of the internet is digital advertising. According to Grand View Research, the industry's revenues are expected to increase at a 14% compound annual rate between now and 2030, so it's not too late to get in on the action.
But where to start to find good investment opportunities? I believe a basket approach is a sound strategy to gain exposure to the growth of the digital ad industry, which means buying all the following stocks.
Dominating the ad industry
As one of the leading internet enterprises, Alphabet (GOOGL +0.65%) (GOOG +0.55%) spearheaded the digital advertising space. Unsurprisingly, it commands the industry's leading market share.
With essential internet-based properties under its belt, namely google.com and youtube.com, it shouldn't shock people that the web traffic this business attracts creates virtually unlimited opportunities to sell digital ads. In the most recent quarter (Q3 2023, ended Sept. 30), 78% of the company's total revenue was derived from advertising. It's clearly still the major driver of financial results.
Second place in the industry is Meta Platforms (META +0.03%). In a similar fashion to Alphabet, Meta owns and operates some incredibly popular apps. Combined, Facebook, Instagram, Messenger, and WhatsApp have a whopping 4 billion monthly active users. The company has monetized all the social activity it facilitates via ads.
It's hard to argue with just how outstanding these businesses are. Although both are investing heavily in artificial intelligence to bolster their competitive positions while also figuring out ways to serve advertising customers better, they are extremely profitable.
Last quarter, Meta's operating margin of 40% was higher than Alphabet's 28%. Nonetheless, they both were stellar.
The stocks also don't carry excessive valuation multiples. As of this writing, Alphabet and Meta shares trade at forward price-to-earnings (P/E) ratios of about 24. This represents only a 20% premium to the overall S&P 500. Investors shouldn't hesitate to buy these stocks.
Image source: Getty Images.
Moving on up
Two other FAANG businesses are also becoming more prominent players in the digital advertising market. And readers are assuredly familiar with them.
In October, Amazon's (AMZN +0.11%) website saw nearly 4.2 billion visitors. With such a massive e-commerce marketplace that constantly has so many eyeballs scrolling through it, it's unsurprising that digital ads have become a key revenue generator for the company. In the third quarter, Amazon's ad sales jumped 25% year over year to more than $12 billion. This puts it in third place in the industry, behind Alphabet and Meta.
We also can't forget about Apple (AAPL 1.05%) -- the most valuable company in the world -- with a market cap of $3 trillion. The iPhone maker started selling ads in the App Store and News app about seven years ago. It's estimated the business will produce $5.2 billion in ad sales in 2023, up from 135% in 2020.
To be clear, though, Apple's valuation gives me pause. The stock currently trades at a forward P/E ratio of 29. This is a steep price for an enterprise in the mature stages of its lifecycle and lacking the growth opportunities of Alphabet, Meta, and Amazon. However, I can see why some investors would still want to own such a dominant tech giant.
No doubt, buying shares in all four of these companies would give you adequate exposure to the digital advertising market.
