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Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) and Meta Platforms (NASDAQ:META) are “well positioned” to benefit from the rise in digital advertising, Wedbush Securities said, ahead of the company’s respective third-quarter results.
Analyst Dan Ives, who reiterated outperform ratings on both Alphabet (GOOG) (GOOGL) and Meta Platforms (META) shares, noted that that the set-up for the second-half of 2023 is “positive” for digital advertising, even amid uncertainty in the macroeconomic environment persists.
Citing data from research firm Magna, Ives said that digital ad growth accelerated to 8.7% year-over-year in the second-quarter, with further gains likely to come.
“Growth should continue to accelerate in 3Q and 4Q and we highlight Magna’s Fall 2023 Update which raised the firm’s outlook for 2023 U.S. digital advertising growth to 9.6% from 7.9% Y/Y,” Ives wrote in an investor note.
Ives added that data collected by research firm Skai also shows a “healthy” backdrop for digital advertising in the third-quarter. Over the past five quarters, the firm’s data showed more than $9B in spending and only uses accounts with 15 consecutive months of spending.
The firm added that the accounts had 35% year-over-year growth in retail media growth and between 5% and 6% growth in paid search, up from last quarter’s 3%.
Skai’s data showed that paid social spending declined 3% year-over-year, an improvement from the 4% decline in the second-quarter, which could be a positive sign for both Meta (META) and Pinterest (PINS). Wedbush has a neutral rating on Pinterest.
“Rising ad prices and the lapping of price pressure last year and in [the first-half of 2023] should be a tailwind for Meta and the social channel in the coming quarters,” Ives explained further.
“While the readthrough was incrementally more positive for retail media and search versus social, we continue to believe underlying social trends are improving sequentially and emphasize the mix dynamics that limit the correlation between Skai’s data and the broader social segment.”
For Alphabet (GOOG) (GOOGL), Ives is expecting benefits not only from continued ad growth, but a continued focus on operating expenses and the pace of capital spending, citing recent reports about layoffs in various divisions, including Google News, Verily and Waymo.
“We expect Alphabet will sustain operating margins near 28-29% through 2025, supporting robust FCF generation (30.4% FCF margin through FY23, up to 34.6% by 2025) while the company invests in its three priority areas: AI, retail, and YouTube,” Ives explained.
Alphabet (GOOG) (GOOGL) is slated to report results on October 24. A consensus of analysts estimate the company will earn $1.45 per share on $75.76B in revenue.
For Meta (META), it’s much of the same, though the company has been more proactive with layoffs, having undergone three rounds of job cuts over the past year.
In total, Meta is believed to have let go roughly 25,000 employees, compared to around 12,000 for Alphabet.
A consensus of analysts estimate the company will earn $3.60 per share on $33.43B in revenue.
