Investors fear advertising slowdown, but $876bn trend in digital ad spend says otherwise
Rising inflation is inspiring fears of a cyclical slowdown in advertising dollars, duly reflected in the plummeting stocks of most media and advertising companies. One company however is circumventing the trend of tanking revenues and share price through its comprehensive digital advertising ecosystem – and several others predict a healthy, thriving future for ad spend leading into H2.
Alphabet Inc., Google’s behemothic holding company, has only posted a decline in revenue once, in the second quarter of 2020, when the COVID-19 pandemic began spreading around the globe.
The stability of Alphabet’s share price compared to other holding companies in the advertising space can be attributed in part to Alphabet’s diversified business model. During the 2008-2009 recession, Google still managed to grow revenue, albeit more slowly than in previous years.
Google advertising revenues in Q1 22 rose to $54.66 billion (A$76.54 billion) from $44.68 billion (A$62.56 billion) last year, as YouTube ad and Google Search revenues increased. Google Cloud revenues rose to $5.82 billion (A$8.15 billion) from $4.05 billion (A$5.67 billion) last year. Digital advertising generates the majority of Alphabet’s revenue, but Google Cloud revenues are also growing rapidly.
The stability and profitability of Alphabet’s dominant digital-ad business means investors perceive it as a safer buy in 2022 than a stock like Snap, which has seen a tremendous drop of -69.86% in its value on the share market in the YTD.
However, in Q1 this year, Alphabet did report first-quarter profit of $16.44 billion (A$23.01 billion) or US$24.62 per share, a drop from last year’s profit of $17.93 billion (A$25.1 billion) or US$26.29 per share. This drop is still minimal in contrast to the tumult faced by digital advertisers like Snap. Alphabet’s figures and performance pose a stark opposition to Snap, whose profit warning earlier in May triggered a multi-billion dollar tumble in valuation of tech stocks across the board.
Kevin Fernandes, head of data solutions and adtech at Havas Media Australia, was positive that Alphabet’s vast and sophisticated digital advertising ecosystem would enable it fare better than its competitors, like Snap.
“I think the major advantage for Alphabet is its diverse and often performance-based suite of platforms. The challenge for competitors like Snap, Twitter is its hard-to-measure success metric along with majority of its revenue being brand advertising when compared to budgets activated across Search which are instantly performance led through number of clicks or YouTube which attract new customers and help retaining existing ones through story-telling capabilities,” Fernandes told Mumbrella.
“I suppose this is down to the breadth of platforms it offers, coupled with 75%+ of brands being reliant on data operation and analytic capabilities owned by Alphabet. Every stage of the marketing funnel can be achieved right from YouTube, DV360 through to Google Ads and AdWords, this is not even talking about the 25 other apps or platforms owned by Alphabet.
More importantly, success or ROI is measured through the same lens which makes it challenging for any other publishers including Meta. Of course, with the ever-changing ecosystem and phasing of cookies et cetera., there could be a great opportunity for others to compete for advertising budget.”
Digital ad revenues: a projected growth of $876 in four years’ time
Statista reported digital advertising spending worldwide amounted to $521.02 billion USD in 2021. Their research projects that by 2026, global ad spend would reach $876 billion.
If investor fears of recession and downturn in ad spend do materialise into reality, the slowdown in digital advertising could deliver a substantial blow to Alphabet. According to an SEC filing, Alphabet generated more than 80% of total revenue from the display of ads online in 2021.
Silicon Valley giant Meta told employees in a memo in May it was ‘pausing hiring’ due to revenue growth being slower than expected – given a large portion of Meta’s revenue comes from digital advertising, it’s safe to say there has been somewhat of a slowdown.
“I think it is no secret that at some point we might see a slow shift in client investments to pre-pandemic times. What I am sure about though is that the shift in consumer behaviour is here to stay, which makes digital investments and activations even more important to a brand. In the past 2 years of so, we’ve seen a steady shift in budgets from hard to measure brand-building channels like print and radio to more efficient and measurable channels across digital. If anything, this will continue to rise if not be steady as it not only offers new customers for brands but also improved ROI and performance,” said Fernandes.
Digital advertising revenue soared 35% to $189 billion in 2021 according to the IAB Internet Advertising Revenue Report: Full Year 2021, released this April. The report found that social media advertising was up 39.3% to $57.7 billion, as consumers continue to engage with Meta platforms, Snapchat, TikTok, and Twitter.
Widely anticipated global events set to boost advertising revenues
Macroeconomic and geopolitical concerns such as inflation, stock market tumult, the Russian invasion of Ukraine, recession fears, hiked interest rates and a bear market haven’t stopped global ad agencies Zenith, MAGNA and GroupM from expressing optimism about overall growth in ad spend following the pandemic.
Last month, the three agencies released midyear H2 22 forecasts of the market, with notable events like the US midterm elections, the FIFA World Cup and the Winter Olympics spelling boosts of revenue for the advertising market.
Zenith, for example, predicted 2022 ad growth in the US market would continue at +12% from 2021. Zenith projected an increase of $33 billion in ad dollars in the US market, with the growth being driven by digital sectors, which will account for 57% of the incremental increase in ad dollars for the year.
The latest Next&Co Digital Media Wastage Report found that while total advertising expenditure was reaching new records, advertisers continue to waste their ad dollars, with more than $134.3 million reported to have been wasted in the January to March 2022 quarter, an average of 40% media spend waste.
In Q1, the SMI reported digital media again as the largest standalone media in January with revenues up 18.7 per cent – so despite recent bear market realities, signs are currently pointing to a healthy, steadily thriving digital advertising marketplace, and upcoming Q2 results are set to either affirm or dispute this.
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topics
advertising revenue
Alphabet Inc
digital ad revenue
digital ad spend
Google
IAB Australia
inflation
macroeconomic environment
share price
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