How To Profit From The False Promise Of Internet Advertising by Tony Sagami, Mauldin Economics
My first exposure to the advertising business was McMann & Tate, the agency where Darrin Stephens of Bewitched worked. Sure, I tuned in mainly to see the lovely Samantha Stephens, but I do remember that there was a lot of money to be made as an ad man.
Some of my college fraternity brothers must have come to the same conclusion because several of them went on to ad agencies, and a few of them had very successful careers.
At the end of last week, Bruce Greenwald, the founding director of the Heilbrunn Center for Graham and Dodd Investing at Columbia Business School, sat down for a Fireside Chat with Li Lu, the founder and chairman of Himalaya Capital as part of the 13th Columbia China Business Conference. The chat spanned many different topics, Read More
However, the advertising business never made much sense to me. I understood from my economics background that the purpose of advertising was to increase the slope of the demand curve, but I can honestly say that I’ve never bought more Budweiser, more Ford pickups, or more Charmin toilet paper because of advertising.
And the new world of Internet advertising is even more puzzling to me. I completely ignore banner ads; in fact, I’m more prone to boycott a product if I’m bombarded with pesky popup ads or unwelcome email messages. I can’t count the number of times I’ve unsubscribed from these unwelcome sales attempts.
Effective or not, Internet advertising has become big business; total online ad spending hit $49.5 billion in 2014. However, outside of mobile advertising—the new untested frontier—the growth of online-advertising spending has slowed to a snail’s pace.
And it looks like it’s going to slow down even further. Giant advertisers like Procter & Gamble, Unilever, L’Oréal SA, Coca-Cola, and Visa have announced that they’re putting their annual advertising budgets—combined, worth $20 billion—under evaluation.
We’re talking big bucks here. P&G and Unilever, for example, spent $9.2 and $7.0 billion, respectively, last year but are now searching for ways to cut back.
Think I’m an ill-informed advertising Grinch? Don’t take my word for it; listen to what the industry insiders are saying.
The Sky Is Falling Warning #1: London-based WPP is the world’s largest advertising agency, and its CEO Martin Sorrell recently warned that advertisers are “examining their costs with increasing rigor.”
The Sky Is Falling Warning #2: Last week, online advertising agency ZenithOptimedia told Wall Street to lower its global ad spending forecasts for 2015 and 2016. (By the way, 2016 is a Summer Olympics year, which is typically a big event for advertising spending.)
The Sky Is Falling Warning #3: When Google reported its Q1 results on April 27, it revealed that the price it gets for its online ads dropped by 7% over the last year. Falling prices aren’t bad if you can make up for them with higher volume, but as the above table shows, search-based advertising grew from $18.36 billion in 2013 to $18.95 billion in 2014… nothing to get excited about.
Perhaps the biggest threat is the growing sophistication of ad-blocking software people like me use to reduce those pesky Internet advertisements. Software sales jumped by 70% in the last year.
Believe me, Internet advertisers are very worried about ad-blocking software. A fresh poll from Media Week showed that two-thirds of the readers of its industry publications are concerned.
As always, there are investment implications to these major trends. I suggest that advertising agencies, both traditional and Internet based, are stocks that you should consider selling if you own them. Or, if you’re a more aggressive investor, consider short selling or buying put options to profit from the industry’s falling stock prices.
Traditional Advertising Agencies
Omnicom Group, Inc. (OMC)
Lamar Advertising Co. (LAMR)
The Interpublic Group of Companies, Inc. (IPG)
Publicis Groupe S.A. (PUBGY)
WPP PLC (WPPGY)
Google Inc (NASDAQ:GOOG)
Rocket Fuel Inc. (FUEL)
Tremor Video, Inc. (TRMR)
Millennial Media Inc. (MM)
The Rubicon Project, Inc. (RUBI)
YuMe, Inc. (YUME)
Criteo SA (CRTO)
I’m not suggesting you rush out and sell or short any of these companies tomorrow morning—click here to see what I think are the best put option targets right now. As always, timing is everything, but it will take more than a few twitches of Samantha Stephens’ nose to save the Internet advertising industry.
30-year market expert Tony Sagami leads the Yield Shark and Rational Bear advisories at Mauldin Economics. To learn more about Yield Shark and how it helps you maximize dividend income, click here. To learn more about Rational Bear and how you can use it to benefit from falling stocks and sectors, click here.