Online advertising makes its winners known
Advertising is not a linear business. It used to be that a rising tide could raise all ships – yet we saw very strong advertising results from Meta and Amazon last week (Alphabet’s ad sales were good, but not great) and we saw a marked decline in “second tier” ad platforms like Snapchat, which reported a 12% decline for brand-orientated business advertising and a 9% decline for their direct response business. A lot this has to do with is how much certain platforms let Snapchat track user’s data – Meta had that issue about a year ago; now Snapchat has that same issue. It’s also worth noting that Snapchat is still not profitable (unlike the ad-tech behemoths) – they recorded a loss of ~$328M for the quarter – adjusted EBITDA only looked positive because of about ~$315M in stock based compensation – it’s a trick a lot of tech companies do but doesn’t make a lot of sense of us – stock based comp is still an expense, even if it’s on the shoulders of shareholders. This, to us, is demonstrative of why we prefer owning “mature” tech companies that are reducing share count (Alphabet is buying back around ~5% of its total outstanding stock): stock-based compensation dilutes stock holders substantially. Below is a chart of Snapchat’s total share count over the years. Only recently have they started to reduce that count – but it is still muddied substantially by all that stock based compensation. Also see below a chart of Alphabet’s total outstanding stock – it’s almost the inverse. One company gave its owners more ownership of the company while the other diluted its owners. Which would you rather own?
Snapchat – Total Shares Outstanding
Alphabet – Total Shares Outstanding
A similar story could be seen over at Pinterest: average revenue per user (globally) decelerated from $1.96 to $1.32. The wider story is mature tech players are increasingly getting the lion’s share of advertising – and growing – while their smaller competitors are left behind.
Back to share repurchases, for a second – why do we care so much? We were intrigued to read a piece in a recent edition of the FT which noted that Larry Ellison, the long-time chairman of Oracle, has slowly increased his ownership in the company from around 1/5th a decade ago to 43% of the entire company as of today. He hasn’t bought any more. Oracle – which some people may call a tech dinosaur – has simply repurchased almost $150B of its own stock. Alphabet is engaging in similar moves now. Alphabet’s results weren’t as spectacular as Amazon’s or Meta’s, but perhaps they don’t need to be with such mass-share repurchasing.
Broader-theme, though, is that it’s hard out there to be a second-tier advertising player. The “big boys” are taking market share and undercutting the competition. We maintain a preference towards Microsoft, Amazon and Alphabet (better value at Alphabet – 17x earnings – but hard to discount Microsoft’s dominance of the office market).
Week Ahead
Large slate of earnings for the week ahead but the most interesting to us is Apple – it can feel like Apple is the sun which the world of equities revolves around; we’re expecting to see some weakness in consumer devices (especially iPhones). Expecting EPS of $1.40 or thereabouts. Shopify reports too – looking to their earnings for another sign of how the consumer is going.
Australia
Solid result from Resmed – NPAT ~3% ahead of consensus. Nice read-through for Fisher and Paykel Healthcare which we remain buy-rated on – preference for exposure to healhcare is F&P locally and Johnson & Johnson internationally. Good update from Coles Group too — preference is Woolworths – population growth a factor here as well as those supermarket margins being (more-than) able to keep up with the pace of inflation.
Week ahead
Tuesday: RBA (Reserve Bank of Australia) Interest Rate Decision, Eurozone Inflation (CPI) Data
Earnings from: Pfizer, Starbucks, BP
Wednesday: Eurozone Unemployment Data
Earnings from: PepsiCo, Qualcomm Inc, Airbus, Estee Lauder Companies
Thursday: US Fed Interest Rate Decision (FOMC)
Earnings from: Apple Inc, ANZ, NAB, Booking Holdings, Shopify
Friday: ECB (European Central Bank) Interest Rate Decision, US Non-Farm Payroll
Earnings from: Macquarie Group