almost 2 years ago • 3 mins
After shouting from the rooftops about how well they did during the pandemic, digital advertisers have suddenly realized that not all publicity is good publicity…
✍️ Connecting The Dots
When coronavirus fears were at their height in the US and Europe in March 2020, all but essential businesses were forced to shut their doors. That included retailers of nice-to-haves, which naturally stopped advertising products that people weren’t able to go out and buy. That led them to promptly yank online ad spending, which left a tender bruise on digital ad giants’ bottom lines. But it didn’t last long, as consumers turned to online shopping and brands spent big on winning them over. Just look at Amazon, whose ad business went from $16 billion of annualized revenue in the first quarter of 2020 to $40 billion by the end of 2021.
Now, though, the tide has turned again. For one thing, rising central bank interest rates have made the risk-reward of high-growth tech stocks like Meta, Amazon, and Alphabet less appealing. And for another, the current global economic slowdown – exacerbated by high inflation and the war in Ukraine – has forced shoppers all over the world to pinch pennies. That’s encouraged advertisers to slash spending yet again – a dynamic that was laid bare last week, when Snap’s stock tumbled 40% after a #nofilter earnings forecast that revealed some ugly things in the company’s future.
1. Understand a stock’s drivers before you buy.
Investors who backed digital ad companies through 2020 might've been delighted with their decision: Meta, for instance, was up 130% between March 2020’s low point and the end of 2021. But with Meta’s stock now down over 40% this year, it’s clear that there were longer-term considerations worth keeping in mind. First, that interest rates would eventually start to rise again, and growth stocks would almost certainly lose out on the back of it. And second, that consumer spending would eventually slow down, which was bound to have a negative effect on the companies it had previously benefited.
2. There’s no mystery when you spot the clues.
Earlier this month, some of the most predictable and reliable major US retailers like Walmart issued profit warnings. This might’ve been seen as an early warning sign that typically “upstream” businesses – i.e. brands whose products are sold by those same retailers – had been paring back their advertising spend as they tighten their belts. Even cloud computing firm Snowflake – which operates in one of the fastest-growing industries out there – flagged slowing customer spending last week.
🎯 Also On Our Radar
The UK government announced a windfall tax on energy company profits last week, and some analysts think the next targets are consumer staples and mining firms, since they tend to pay high dividends. So if you rely on either of those sectors for income, keep a close eye on how developments unfold.
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