3 Top Digital Advertising Stocks for 2021 Alphabet, Spotify, and Snap

The COVID-19 pandemic has forced businesses to go online and become increasingly reliant on digital advertising. Experts predict that digital ad spending will multiply markedly by 2024. The digital advertisement space is also expected to witness emerging trends, such as in-game advertising, a rise in mobile advertising, and the development of more technology to ensure user privacy. Alphabet (GOOGL), Spotify Technology (SPOT), and Snap (SNAP) are the leading players in this space that we believe are likely to reap direct benefits from these developments.

The new normal has compelled businesses to digitize themselves, and with that has grown a  new reliance on digital advertising. In the future, digital advertising is expected to  make huge inroads in the traditional ad space.

The way businesses want to connect with their target audiences has changed measurably. It is a trend that will likely continue. According to Morningstar, higher digital ad spending will  lead advertising budgets higher through 2024. Market research firm SpendEdge projects that the digital advertising services market will expand by $236 billion between 2020 - 2024.

The share of traditional ad channels, such as  television and newspapers, will continue to shrink, continuing a trend that began a few years ago. But to attain dominance, digital advertising also needs to adapt to new trends. According to experts, online ads will go beyond social media and e-commerce portals. In-game advertising will be the next new trend with immense growth prospects. Similarly, user privacy and data transparency will become imperative to digital marketers.

We believe this evolving landscape has tremendous potential and that leading companies such as Alphabet Inc. (GOOGL), Spotify Technology S.A. (SPOT), and Snap Inc. (SNAP) will benefit.

Alphabet Inc. - (GOOGL)

GOOGL is the global leader in digital advertising space. As a search engine, it commands a 90% share of the global ad market. The company has many  other businesses, such as YouTube, Google Play, and its Smart Home speakers. GOOGL also offers hardware devices, digital content, cloud services, and various other products and services.

Google Ads has announced new enhancements.  Two new features should help in streamlining and including enhanced controls for advertisers, thus resulting in more efficiency in the creation and management of leads.

Last month, DAZN, a British OTT platform partnered with GOOGL to establish a new technology stack. Making it  a leading player in delivering addressable broadcasting advertising in Germany, Austria, and Switzerland.

GOOGL’s revenue during the third quarter ended September 30, 2020 rose 14% year-over-year to $46.2 billion, driven by an uptick in advertising revenue. YouTube’s ad revenues rose 32.6%   in the third quarter. At the end of the third quarter, YouTube Music and YouTube Premium had a total paid subscriber base of more than  30 million. The company’s EPS for the third quarter jumped 62% year-over-year to $16.40.

Analysts expect revenue for the quarter ending March 31, 2021 to be $48.6 billion, indicating an 18.1% year-over-year increase. EPS is likely to grow at the rate of 18.7% per annum over the next five years.

GOOGL has climbed  26.8% during the past year to close yesterday’s session at $1740.05. Over the past six months, the stock climbed 17.4%.

How does GOOGL stack up for the POWR Ratings?

A for Trade Grade

A for Buy & Hold Grade

B for Peer Grade

A for Industry Rank

B for Overall POWR Rating.

The stock is currently ranked #1 of 67 stocks in the Internet Industry.

Spotify Technology S.A. (SPOT)

SPOT is a high-quality Swedish audio streaming service provider in the United States, the United Kingdom, Luxembourg, and other countries. The company operates through two segments--Premium and Ad-Supported. SPOT offers unlimited online and offline streaming access to its music catalog and podcasts without commercial breaks.

During the third quarter ended September 30, 2020, SPOT’s revenue climbed 14.1% year-over-year to Euro 1.9 billion. At the end of the quarter, the company had 320 million active users in more than 79 countries, of which 185 are ad-supported active users. North America, Europe, and India saw significant user growth. SPOT also launched its services in Russia, CIS, and the Balkans in July. The company also reported that its global content consumption hours outpaced pre-COVID levels during the quarter. SPOT ended the quarter with Euro 103 million in free cash flow.

The Street expects revenue for the quarter ending December 3, 2020 to be $2.6 billion, representing a 42% year-over-year increase. EPS is likely to grow at the rate of 147.6% per annum over the next five years.

During the past year, SPOT has rallied 103.9% to end yesterday’s session at $313.72. Over the past six months, the stock climbed 14.6%.

SPOT’s POWR Ratings reflect this promising outlook. It has an overall rating of “Buy” with an “A” for Trade Grade and Peer Grade. It  also has a “B” for Buy & Hold Grade. It is currently ranked #1 of 11 stocks in the Entertainment - Radio Industry.

Snap Inc. (SNAP)

SNAP is a social media company that connects people through visual communication, storytelling, and other modes of self-expression. It is an app that allows users to enhance and customize images and videos according to their preferences. Snap also has a broad line-up of video content and games that is immensely popular among millennials.

SNAP has announced a partnership with Unity Software (U), a cross-platform game engine, for extended reach of Unity’s Ad supply to Snap Audience Network (SAN). The SAN advertiser campaigns will now include video inventory from Unity’s extensive network of mobile gaming titles. This should help advertisers extend beyond SNAP. The partnership will also bring Snap technology to game developers through Snap Kit.

During the third quarter ended September 30, 2020, SNAP delivered revenue of $678.67 million, surpassing analysts’ expectations by 22.1%, largely driven by advertisements. Compared to the year-ago period, its revenue surged 52.1%. Due to increased usage amid the pandemic, SNAP posted an 18% year-over-year growth in its daily active users to 249 million. The company’s adjusted EPS came in at $0.01, versus  a consensus estimate of a $0.05 loss.

The consensus revenue estimate for the fourth quarter ended December 31, 2020 is  $849.5 million, signifying a 51.5% year-over-year increase. EPS is expected to rise at the rate of 67.4% per annum over the next five years.

SNAP has leaped 196.2% in the past year to close at $50.31 in yesterday’s trading session. The stock has rallied 113.6% during the past six months.

It is no surprise that SNAP is rated “Buy” with an “A” for Trade Grade and Industry Rank. It has a “B” for Peer Grade and Buy & Hold Grade. It is currently ranked #17 of 67 stocks in the Internet Industry.

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GOOGL shares were trading at $1,727.43 per share on Wednesday afternoon, down $12.62 (-0.73%). Year-to-date, GOOGL has declined -1.44%, versus a 0.57% rise in the benchmark S&P 500 index during the same period.

About the Author: Namrata Sen Chanda

Namrata is an accomplished financial journalist, with nearly a decade of experience. She specializes in interpreting news releases and framing investment strategies, and has worked with some of the leading companies in real estate, banking, insurance, mutual funds, financial research, fintech, and investment education.


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