The recent share price performance of certain advertising companies has not impressed investors. WPP (WPP) has seen its share price fall by 8% year-to-date and S4 Capital (SFOR) has seen its shares dramatically fall 62% in the same period.

Both companies have cited tech clients in the US cutting their advertising spend and the current macroeconomic climate as reasons for weak performance. This is a short-term issue and history tells us that advertising companies are capable of delivering strong returns for shareholders when times are good. It may simply be a matter of picking your entry point.

Sentiment is certainly weak towards the sector now, but the first sign of brighter economic conditions could be the trigger point to consider getting exposure to these types of companies.

In this article we discuss the different advertising-related stocks on key markets in the UK, mainland Europe and the US, and funds that invest in this space. We also discuss the key performance indicators to study when researching investment opportunities and explore the role of AI in the sector.

WHY INVEST IN THE SECTOR?

Advertising agencies are a good proxy for the state of the economy. If corporates are worried about the near-term outlook, they cut back on advertising and marketing. If they are bullish, they spend more on promotions.

When times are good, companies can spend significant amounts of money to get their brand or products noticed. That means big business for advertising agencies.

Global advertising spend is forecast to grow by 3.3% in 2023 to reach $727.9 billion, according to the Dentsu Global Ad Spend report published in May this year. Stronger growth is expected in 2024 where the global advertising market is forecast to increase by 4.7% to reach $762.5 billion, with a further 3.8% growth in 2025.

Although the Dentsu report points to continued growth in 2023, the forecast has been adjusted marginally downwards from the 3.5% predicted in December 2022. Growth is being driven by media price inflation rather than increased advertising volume.

The second half of 2023 is expected to see ongoing growth in digital advertising, but in an ‘uncharacteristic single digit increase’ (7.8%), which has only happened twice before in the last 20 years: in 2009 (financial crisis consequences) and in 2020 (pandemic), according to the report. There was double-digit growth in preceding years.

Digital spend is expected to reach $424.3 billion by the end of 2023, accounting for 58.3% of all advertising spend. This could increase further to a 59.1% share in 2024 and 60.3% in 2025, predicts Dentsu.

KEY METRICS FOR THE ADVERTISING SECTOR 

- RETURN ON ADVERTISING SPEND: The amount of revenue a company is earning for every pound or dollar it spends on advertising.

- AVERAGE CLICK-THROUGH RATE: The click-through rate measures the percentage of people who viewed an advert and clicked on it. The average click-through rate for an advert can help an advertising company or agency understand how effective their copy, design and landing pages has been.

- CONVERSION RATES: This is a method used by advertising companies or agencies to measure sales growth and engagement. It looks at the percentage of people who responded to an advert and then bought the product or service.

- COST PER CLICK: This is a measurement of the amount of money you pay when a consumer clicks your advert.

- CUSTOMER ACQUISITION COST: This show has much it has cost to acquire customers via promotions. You divide the total cost of sales and marketing by the total number of customers acquired over a given time.

Source: Shares Magazine, LayerFive

THE RISE OF ARTIFICIAL INTELLIGENCE

Artificial intelligence has created opportunities for social media networks, helping to keep users more engaged by serving up more relevant videos on Facebook, for example. The longer people spend on social networks, the greater the opportunity to serve more adverts to them.

Companies are embracing AI in their promotions and it is giving them a new creative spark. Fresh ideas could lead to increased advertising spend.

For example, Coca-Cola (KO:NYSE) recently used AI to help create an advert called ‘Masterpiece’ which features its products integrated into famous paintings and sculptures.

‘Artificial intelligence has grabbed the attention of not only big tech firms like Microsoft and Google, but also marketers who are starting to assume that AI-powered platforms can also provide creativity,’ says Ali Mogharabi, senior equity analyst at Morningstar.

Advertising agencies are doing everything they can to capitalise on the trend. Mark Read, managing director of WPP, said at the company’s second quarter results: ‘We have exciting future plans in AI. We are leveraging our efforts with partnerships with the leading players including Adobe, Google, IBM, Microsoft, Nvidia and OpenAI. We are delivering work powered by AI for clients including Nestle and Nike.’

Nick Waters, chief executive of media marketing consultancy Ebiquity (EBQ:AIM), told Shares that AI is transforming the advertising industry at pace with the use of personalised adverts and chatbots, which can help consumers make buying decisions.

Waters says notable success can be seen in the paid search market where AI is used to generate keywords and text that achieve stronger results than human input.

‘There have been tentative steps taken to apply AI to the development of longer form copy, but this is yet to prove itself,’ he remarks.

ADVERTISING COMPANIES ON THE STOCK MARKET

Investors are able to buy shares in the world’s biggest advertising agencies including WPP, Omnicom (OMC:NYSE), Interpublic (IPG:NYSE) and Publicis (PUB:EPA).

Interpublic is one of the best performing stocks in its sector over the past five years with a 33% gain. However, it was one of the worst-performing stocks in the S&P 500 after it announced disappointing second quarter results on 31 July this year.

The company reported a 2% drop in net revenue of $2.33 billion and revised its full year organic growth expectation to 1% from 2%. It is busy on many projects but tech clients are holding back on spending, with similar messages coming from the likes of S4 Capital and M&C Saatchi (SAA:AIM).

Publicis seemed to buck the second quarter malaise experienced by Interpublic and WPP, among others. Organic growth in the period grew by 7.1% and the company upgraded its 2023 guidance on all key performance indicators despite macro uncertainties. Shares in Publicis have increased by 42% over the past five years.

SOCIAL MEDIA GIANTS

The alternative way to get exposure to the sector is to invest in the owners of social media networks and search engines. Alphabet (GOOG:NASDAQ) owns Google and YouTube and generated $58.1 billion in advertising income across these platforms in the quarter to 30 June alone.

Companies pay to appear on Google search results for certain terms, they carry adverts on the search engine, and YouTube has more than 2.7 billion active users who are forced to view adverts when they watch clips on the platform.

Alphabet has attributed its recent success to a better understanding and incorporation of artificial intelligence products into its offering.

Meta Platforms (META:NASDAQ) is another giant in the advertising space thanks to its ownership of Facebook and Instagram. In the second quarter of 2023, advertising impressions delivered across its apps increased by 34% year-over-year but the average price per advert decreased by 16% year-over-year.

CAN I INVEST IN THE SECTOR VIA FUNDS?

While there is not an advertising-specific tracker fund, a couple of active funds invest in advertising stocks as part of a diversified portfolio.

For example, Fidelity Global Dividend (B7GJPN7) has Omnicom in its top 10 holdings, representing 3.02% of the portfolio at the time of writing.

FP Octopus UK Microcap Growth Fund (BYQ7HN4) has 3.1% of its portfolio in digital communications and media firm Next 15 (NFG:AIM) and 3.6% of its portfolio in M&C Saatchi.

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