The tough economic climate continues to impact digital advertising, with tech giant Alphabet the latest to report a sharp ad slowdown last night. Despite the ongoing headwinds, Taymour Tamaddon, portfolio manager of the T. Rowe Price US Large Cap Growth Equity strategy, highlights four reasons why he remains bullish on the long-term prospects for the digital advertising space:
The growth in digital advertising spending in recent years has been nothing short of spectacular. From relatively low penetration a decade ago, digital advertising today serves as the primary platform for most companies’ marketing activity.
Recently, however, various factors have combined to negatively impact the digital sector. Whether the decrease in digital advertising spending is a downturn or just a stabilisation, the near‑term impact of the post‑pandemic environment on advertising and related industries is undeniable. Companies that overextended during the pandemic by increasing ad spend or head count are now pulling back. Longer term, however, we anticipate spending growth to resume to a more normalised path.
We see four key reasons why the near‑term challenges digital advertising faces are expected to be a temporary blip on the industry’s longer‑term growth profile:
The powerful tailwinds that have supported the rapid growth in digital advertising over the past decade – growing internet penetration, rising popularity of smartphones, increase in social media usage, rising penetration of e‑commerce, increased investment in technology and digital platforms – are very much intact. These same tailwinds are expected to underpin growth moving forward. These secular trends show no sign of abating, and as has been the case over the past decade, we expect digital advertising to continue to outperform other forms of media for years to come.
The past year has been illuminating in the sense it has highlighted the underappreciated cyclicality of digital advertising. Amid a more volatile macro environment, where spending visibility has become less clear, it has been a little surprising to see how quickly companies have moved to cut the digital portion of overall marketing budgets. Nevertheless, despite the recessionary period we are currently seeing, the long‑term potential that digital advertising offers is hard to deny. One of the main reasons is the opportunity for superior returns on investment.
Advertising no longer needs to be a case of going in blind. Instead of generic advertisements aimed at no particular audience, the data‑driven nature of digital advertising provides more accurate, measurable, and immediate customer feedback. This allows marketing teams to plan campaigns in a much better – and more targeted – way, zeroing in on a specific audience and providing tailored offers or products to the very people most likely to act on those offers. This compares with more traditional avenues like print media or billboards, which provide zero feedback or customer insights.
Despite the sharp deceleration in digital ad spending seen in 2022, which also needs to be considered in the context of the pandemic‑distorted levels of 2021, the US digital advertising market is expected to continue to grow at a steady pace. Spending in the US is anticipated to surpass $300bn by 2025, which would account for roughly 75% of all media spending.
The one‑stop shop nature of digital advertising should see it continue to take market share from other, more traditional, advertising channels. Whereas print can only serve text and picture ads, radio only audio ads, and television only video ads, the internet can serve all of the above and more. As such, digital advertising is likely to continue cannibalising these legacy advertising forms. The internet wraps all these individual strengths into one.
Additionally, the shift toward e‑commerce, which was significantly boosted by the restrictions imposed during the coronavirus pandemic, is turning more consumers away from brick‑and‑mortar retail and toward online shopping. This is creating greater opportunities for digital advertisers to reach an ever‑growing online consumer audience.