Why the Trade Desk, Metaplatforms, Amazon and Other Digital Advertising Stocks Dropped Today | The Motley Fool

What happened

Alphabet (GOOGL -9.14%) (GOOG -9.63%), the world leader in online advertising, released its third-quarter financial report after the market closed on Tuesday, and the results were disappointing. Additionally, these results were seen as a harbinger of what is to come for the rest of the digital advertising industry.

As a result, many adtech and digital ad stocks fell on Wednesday as investors pondered what was to come. Shares of The trading post (TTD -4.29%) and Metaplatforms (META -5.59%) fell 8.1% and 5.5%, respectively, while Amazon (AMZN -4.10%) and Roku (ROKU -4.95%) fell by 4.8% and 3.9% respectively. As of 1:59 p.m. ET, the quartet was down 3.9%, 5.1%, 3.9% and 2.9%, respectively.

This sale was widespread, eliminating a wide variety of businesses that depend on digital advertising for their livelihood. Earlier this year, Google’s ad revenue seemed largely immune to recession fears gripping much of Wall Street. It’s well documented that advertising is among the first items in corporate budgets to be slashed during times of economic uncertainty, and it seems reality has finally caught up with the digital advertising pivot.

So what

In the third quarter, Alphabet reported revenue of $69.1 billion, which was up only 6% year-over-year. Foreign currency headwinds played a role as revenue would have increased 11% in constant currency. For context, revenue in the prior year quarter was up 41%.

Topline pressure also weighed on earnings, with earnings per share (EPS) of $1.06 down 24%. Consensus analyst estimates called for revenue of $71 billion and EPS of $1.26, so Alphabet failed to break through either bar.

However, the company’s comments caused investors to pull back as management detailed several factors that will weigh on results in the coming quarter. Alphabet cited tough comps, worsening exchange rate headwinds and lower advertising spending as companies shore up their financial position amid growing economic uncertainty.

Following the disappointing results, analysts issued a wave of price target cuts, with no fewer than 14 of Wall Street’s top slashing their expectations. JMP Securities analyst Andrew Boone appeared to capture the prevailing mood, saying the results were a harbinger that digital advertising this quarter is likely to be weaker than initially thought.

Bernstein analyst Mark Shmulik echoed those sentiments, writing, “Google is an ad company first, and digital ads [are] no longer a safe place to hide.”

Now what

Alphabet’s results seemed to suggest that the writing was on the wall for the rest of the digital and adtech advertising space. That said, investors shouldn’t be too quick to jump ship, but rather assess the potential of each of these companies on their own merit.

Meta Platforms dominates the social media space and is widely regarded as the other company in the Google/Facebook duopoly that dominates much of the digital advertising space. Given the similarities in their business models and Meta’s reliance on digital advertising for over 97% of its revenue and all of its profits, the comparison is apt. After that, however, the contrasts become more pronounced.

Amazon derives the lion’s share of its revenue from e-commerce and cloud computing, although in recent years digital advertising has been one of the company’s fastest growing businesses. Revenue from Amazon’s ad services has grown 20% so far this year, but still only accounts for 7% of the company’s total revenue, so the sale in this case is likely state-related. of the broader economy and the potential for slower growth in its commerce and cloud segments.

Roku is interesting. Investors inexorably link the company to its namesake streaming devices, but many are unaware that Roku derives the majority of its revenue from digital advertising that appears on its video streaming platform. Alphabet said digital ads on YouTube, the company’s streaming platform, were down 2% year-over-year, the first such drop since Alphabet began reporting results. of the platform in 2019. This could cause problems for Roku in the coming quarters.

Finally, there is The Trade Desk. The company’s adtech platform places digital advertisements on a wide range of online sites, acting as a middleman for some of the largest advertising agencies in the world.

When The Trade Desk released its second quarter report in early August, results were surprisingly strong. Revenue grew 35% year-over-year, while Adjusted EPS increased 11%. At the time, CEO Jeff Green made a startling statement, saying (emphasis mine): “This trend also gives us confidence that we will continue to gain market share in any market environment.”

The Trade Desk is seen as a striking alternative to walled garden advertising offered by Google, Facebook and Amazon. It also has one of the highest valuations, based on its consistently strong results and entrenched position in the industry. While the stock may still feel the impact of the economic downturn, The Trade Desk remains my top pick among these digital advertising and adtech stocks.

Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Danny Vena holds positions at Alphabet (A shares), Amazon, Meta Platforms, Inc., Roku and The Trade Desk. The Motley Fool owns and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Meta Platforms, Inc., Roku and The Trade Desk. The Motley Fool has a disclosure policy.