Digital Ad Spending Slows, but Ad Technology Firms Win

We have reduced our estimates for U.S. total and digital advertising spending growth in 2022 and beyond to reflect a further deceleration in economic growth and data access limitations brought on by regulators and behemoths Apple and soon Google. However, we see opportunities for advertising technology companies LiveRamp RAMP, Magnite MGNI, PubMatic PUBM, and The Trade Desk TTD to benefit even during hard times.

We now think U.S. total and digital advertising spending will grow 7.9% and 8.6% in 2022 and 5.4% and 8.3% in 2023. The 2024 presidential election is likely to accelerate growth. Through 2027, we expect average growth in total and digital ad spending of 5.2% and 7.3%, respectively.

There are pockets in digital advertising that will outpace the overall market, where advertising technology companies can benefit. The first is faster-growing connected TV ad spending, which we estimate will increase at a 21% compound annual growth rate to $40.7 billion by 2026. As campaigns run on connected TVs can also be targeted ads, we expect decisions made by ad sellers and ad buyers to be much more data-driven, dynamic, and automated or programmatic; this is where LiveRamp, Magnite, PubMatic, and The Trade Desk can play a significant role.

In addition, with less third-party data, we expect publishers and advertisers to utilize their first-party data, for which the required technology for onboarding, connecting, and analytics is provided by the advertising technology companies.

While we admire all four of the ad technology companies mentioned above and expect them to continue their double-digit growth through 2026, we prefer investing in PubMatic, Magnite, or LiveRamp over The Trade Desk, as the first three are trading at discounts to our fair value estimates and The Trade Desk is in 3-star territory.

We also incorporated our lower ad spending projections into our growth assumptions and fair value estimates for wide-moat Alphabet GOOG/GOOGL and Meta Platforms META, the largest players in the digital ad market. We reduced our Alphabet and Meta fair value estimates to $160 and $260, respectively, from peaks of $180 and $404 during 2022. We model average advertising revenue growth of 10% for Alphabet’s Google and 9.7% for Meta’s family of apps through 2026, with the assumption that a weak 2022 will be followed by some recovery in 2023-25 before stabilizing in 2026.

Key Takeaways

• Advertising technology continues to increase efficiency in digital advertising by automating the aggregation of ad supply and demand and enabling analytics of data from different sources to improve ad returns on investments.
• Growth in connected TV ad spending will also benefit advertising technology companies, contributing to double-digit top-line growth.
• Publishers and advertisers have become more dependent on their first-party data, along with ad technology that will improve data utilization. With more first-party data utilization and increased transparency, demand could rise for advertising on many more open platforms that may not have as much data as much larger and closed platforms like Facebook, Instagram, Google Search, or YouTube.
• We expect further macro and data access pressures on ad spending, lowering our forecast for total and digital ad spending growth for 2022 and 2023, followed by higher acceleration than initially anticipated in 2024, helped in part by the U.S. presidential election.

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