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Investing, Stocks  | March 10, 2020

Stocks have been getting crushed over the past week. Certain sectors have taken a particular beating, such as travel stocks. But very little has been immune. It’s not surprising that tech companies with supply chains or major customers in Asia are getting hit.

However, most tech stocks are going down, even if they face no particular impact from the coronavirus from China. This brings us to a specific opportunity: online advertising stocks. If anything, people are using the internet more as folks lay low at home. Yet internet advertising stocks have gone down hard, just like the rest of the market.

And there’s another specific reason to have online advertising stocks on your radar now. That’s because between changes to advertising technology — specifically cookies and stricter privacy laws — are rapidly transforming the landscape.

Matthew Sopha, a clinical assistant professor at Arizona State University’s W. P. Carey School of Business, told InvestorPlace in an e-mail that:

“There has been a distinct shift in terms of third-party content being blocked on platforms in favor of first-party content. For example, Google’s Chrome browser is stepping up enforcement of blocking third-party cookies as users browse content online. While actions like this may sound good, it is worth noting that actions like this have zero impact on first-party cookies on sites like Google’s YouTube. So, there is some movement for agencies like the Federal Trade Commission to pay attention to seemingly anti-competitive practices like this.

This is a complement to recent announcements out of the Department of Justice that they are looking into anti-competitive practices by Google related to their integration of their Ad Server with their Ad Exchange and requirements that advertisers on YouTube are required to use Google advertising solutions to post ads on the platform.”

What will all this mean for online advertising stocks? Here are seven firms in the industry that you should have on your radar.

Online Advertising Stocks: Alphabet (GOOG, GOOGL)

Any discussion of online advertising has to start with Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). The company is the dominant player in the space, controlling 30% of the market. Its vast ecosystem, ranging from its browser to search engine, email, applications and so on, creates unmatched opportunities.

Remarkably enough, Google’s advantages are continuing to grow. Recent efforts to crack down on data tracking after Europe’s privacy law should hinder rivals while affecting Google less.

And as Sopha noted, efforts to crack down on cookie-based tracking is particularly helpful to the company’s cause. Google will continue to harvest as much data as possible, while limiting the information that rivals are able to track.

Google has even more chances to build out its advertising ecosystem in coming years. Take the Fitbit (NYSE:FIT)acquisition. It’s not yet clear if Google will receive regulatory approval to purchase the health tracking hardware company or not. Either way, it shows Google’s ambitions to collect even more data about users to build out its advertising and data ecosystem.

There’s simply no company better equipped to define the future of digital advertising over the next decade.

That said, do watch for regulatory risk. As Sopha said, there’s risk that the government will view Google’s actions as monopolistic. With any dominant business such as Google’s advertising operations, there’s a fine line between highly efficient and anti-competitive.

Facebook (FB)

If Google is the king of online advertising, Facebook (NASDAQ:FB) is the only challenger of nearly equal size. Recent market share data has Google around 36%, with Facebook at 20%. The next closest rival, Twitter (NYSE:TWTR)only has around a quarter of Facebook’s share. For now, at least, Google and Facebook operate as a classic duopoly structure.

And those tend to be highly profitable. Facebook, even with its scandals, regulatory issues and now massive cost increases is still printing money. In fact, Facebook earns nearly $20 billion annually in net income. That adds up to a forward price-earnings ratio of just 20.

It’s even cheaper than that when you realize that Facebook has $20 per share of cash on its balance sheet. The company is buying back loads of stock with the profits it earns from online advertising.

I know folks are down on Facebook for the time being. But you could be missing the cheapest mega-capitalization tech stock in plain sight. Particularly with President Donald Trump’s administration recently backing off its previous rhetoric about potentially breaking up big tech companies imminently, the coast is now clear for Facebook going forward.

Twitter (TWTR)

Google and Facebook are by far the big dogs in the online advertising space. The two of them make up 50% of the market together, and no other player tops 5%. It’s a classic duopoly. However, the field is booming, overall, and there’s plenty of room for a strong third player to emerge.

One possible candidate? Twitter. In fact, Twitter is a (distant) third to Google and Facebook as it is. That said, Twitter has struggled to fully monetize its highly passionate fanbase. Certain decisions, such as foregoing political ads, have made Twitter more user-friendly, but have passed up short-term revenue gains as a result.

Things may be about to change, however. Activist hedge fund Elliott Management has taken a large position in Twitter stock and is trying to oust CEO Jack Dorsey. Some observers think this is a political move, as Elliott is run by a conservative Republican.

InvestorPlace’s Dana Blankenhorn suggested that Elliott’s move is more about focus rather than politics. Dorsey is known for doing many things in addition to running Twitter, and he recently made comments about spending much of his time in Africa. Given Twitter’s underwhelming stock price performance, some shareholders are understandably irritated.

Regardless, Twitter is a fascinating online advertising stock. The company has a great deal of untapped potential. And we appear to be reaching a pivotal moment where Dorsey will have to adjust Twitter’s strategy to please outside investors. Or perhaps Twitter will sell itself to the highest bidder. There’s a lot to like about Twitter stock, but expect volatility in the meantime.

Snap (SNAP)

I’ve been skeptical of Snap’s (NYSE:SNAP) turnaround for awhile now, and that was clearly premature. Snap continued to rally throughout 2019, and shares made it to as high as $20 each. That was an awfully huge reversal, as Snap stock was in the mid-single digits not all that long ago.

However, Snap has now come back to a more level-headed price, with shares trading around $12. That makes sense.

The company is still deeply unprofitable; it lost a billion dollars last year. Analysts are currently forecasting that Snap will become profitable over the next 12 months, but that may be a stretch after the company badly whiffed on its last earnings report.

At $20, you needed to be optimistic that everything would go right for Snap. Back at $12 per share, the overall valuation is down to $16 billion, and it sells for a not crazy 11 times revenues, particularly since revenues are growing at more than 40% per year.

The flaws are still here as well. Snap is burning cash, larger rivals like Facebook often copy its best features, and monetization of much of its user base remains a challenge. The core product, however, is engaging and user growth has picked up again. There’s a case for Snap as a speculative play; it could turn into a dominant online advertising platform with time.

Amazon (AMZN)

You might wonder what Amazon (NASDAQ:AMZN) is doing within the online advertising space. It’s certainly not the company’s largest or most well-known line of business. But Amazon has quietly built itself into a formidable player.

Last October, I broke down one analyst’s sum-of-the-parts take on Amazon. By looking at each of the company’s lines of business, he concluded that Amazon stock was worth $2,300 per share. In particular, he claimed that the Amazon advertising business alone was worth $120 billion.

Now how is Amazon advertising worth that much? For one thing, Amazon has replaced Google Search for many shoppers. People trust the brand and start their search at Amazon. This gives the firm the opportunity to earn lucrative fees pushing sponsored products to the top of the results. This will only grow as voice search gains prominence and Amazon (via Alexa) can cut Google out of the equation entirely.

Amazon also has a treasure trove of data across many services to use for advertising purposes. It’s not clear what Amazon’s advertising business will look like, say, five years from now, but it’s likely to be sizable and highly profitable.

The Trade Desk (TTD)

Recently, The Trade Desk (NASDAQ:TTD) had been a great business selling at an exceedingly high valuation. However, TTD stock has now dropped 15% off the highs, and that has brought down the price enough to make it worth taking a second look. As far as online advertising stocks go, The Trade Desk is clearly in a great part of the market right now.

That’s because The Trade Desk serves as a platform to sell ads across the open internet (outside of Facebook and other closed apps). These areas have historically struggled to achieve full monetization. The Trade Desk, with its heavy use of artificial intelligence and big data, allows websites to pull in higher revenues from users while giving advertisers a much more focused marketing experience.

It’s also built itself on technology that is largely resistant to the recent industry changes around cookies and ad targeting.

The Trade Desk stock is undoubtedly expensive at more than 100 times trailing and 70 times forward earnings. However, the business is posting annual revenue and earnings growth rates in the 30% range. This is a fantastic company within the online advertising space, and if you like buying momentum stocks after a solid pullback, this one could be right in the sweet spot.

Criteo (CRTO)

One issue with the online advertising industry is that the best techniques can change on a dime. One year, a certain company’s solution is hot. Then it gets cold, and the market moves onto something else. While The Trade Desk is posting fantastic numbers right now, it’s understandable if you find the valuation simply too much to stomach for such a fast-moving industry.

That brings us to Criteo (NASDAQ:CRTO), which is more or less the opposite of The Trade Desk. While The Trade Desk’s stock has surged, Criteo has lost most of its value in recent years. There’s plenty of drama and good reasons for concern.

The changes that Sopha mentioned about third-party cookies are hitting Criteo hard. Criteo helps advertisers deliver personalized messages to consumers, and that will get much more difficult after cookies lose relevance. Criteo is working to evolve, but investors are skeptical. It doesn’t help that the CFO just left.

At its core, however, Criteo remains highly profitable at just 8 times earnings, and thus is falling squarely into the value category now. That’s even before you get to the fact that the company has half of its market capitalization in cash on the balance sheet.

The company’s profitability is unlikely to change in the near term, either. Criteo is still gaining new clients, and it sports a greater than 90% annual client retention rate. This is not a business that is dying by any means, though it does have to adapt quickly.

The loss of cookies in coming years will hurt. But the company has a strong customer base and plenty of resources to try to manage the transition to the next generation of ad technology.

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