Since 2000, and the recovery from the dot-com bubble, the most important trend in our economy has been the rapid growth and expansion of digital technology. We see it in many areas – from retail to banking to marketing – and the latter has become the superpower for the leaders of the tech world.
That’s not to say that digital advertising isn’t facing headwinds. Inflation remains persistent in the US, putting a damper on consumer spending, and the ongoing war in the Middle East poses its own economic risks. But despite this, analysis from Interpublic Group’s Magna predicts global ad revenues will surge by 7.2% this year.
Looking at the situation from Wedbush, Scott Devitt, a 5-star analyst rated in the top 3% of the Street’s stock pros, says of the digital ad world: “We see a strengthening digital advertising environment heading into 1Q results, and we highlight: (1) recent positive estimate revisions from industry sources / ad agencies (notably Magna) and (2) strong feedback from the 200 US-based marketers we surveyed in our 1Q24 Digital Advertising Survey.”
Devitt is looking at Alphabet (NASDAQ:GOOGL) and Meta Platforms (NASDAQ:META) in particular as stocks to buy. These are Magnificent 7 tech stocks, powerful companies showing digital advertising strength that will carry them through this year. In fact, using TipRanks’ database, we found out that the analyst consensus has rated both a Strong Buy. Let’s take a closer look.
Alphabet
First up is Alphabet, the parent company of some of the best-known names on the internet – Google and YouTube. Alphabet has leveraged its dominance in online search and the muscle that gives to its digital advertising business to become one of the world’s largest publicly traded firms. With a market cap of $1.97 trillion, Alphabet is the fourth-largest company traded on Wall Street and one of just six valued at $1 trillion-plus.
The company’s primary business is its digital advertising; the Google Advertising segment of the business brought in $65.5 billion in revenue during 4Q23, the last quarter reported, a figure that was more than 75% of the total top line – and was up 11% year-over-year.
The fourth-quarter numbers were strong in other respects too. The total revenue came to $86.3 billion, more than $1 billion ahead of the forecast and up 13.5% from the prior year. The revenues supported an EPS, by GAAP measures, of $1.64 per share, up 59 cents per share, or 56%, from the 4Q22 result – and up 4 cents from the estimates. For the full year 2023, Alphabet realized $307.4 billion in revenues, for an 8.7% year-over-year gain. Alphabet will release its financial results for 1Q24 on April 25; we’ll see then how the company continues to measure up.
For top analyst Scott Devitt, the key points here are the high potential of Alphabet’s ad business and the stock’s current relative discount compared to peer firms.
“We think the near-term setup for Alphabet is the most attractive within our digital advertising coverage. Shares of Google have underperformed peers with the stock appreciating ~5% since the company last reported earnings (January 30)… We think the market hasn’t fully priced in the strength of the underlying demand environment for Google for three primary reasons: (1) Google does not provide quarterly guidance and the strength that Meta and others alluded to early in 1Q is yet to materialize in Google’s reported numbers or in management commentary, (2) the company is viewed as a laggard relative to Meta due in part to comp dynamics that have exaggerated the recent divergence in growth, and (3) the perceived structural risk related to generative AI search (which we view as overdone) has kept some investors sidelined despite the near-term strength of the advertising business. For 1Q, we are raising our estimates and now expect revenue growth of +14% Y/Y, ~140bps ahead of consensus,” Devitt opined.
Devitt’s performance estimates for the stock lead him to give the shares an Outperform (i.e. Buy) rating, with a $175 price target that implies ~11% upside for the coming year. (To watch Devitt’s track record, click here)
Like its mega-cap peers, Alphabet has picked up plenty of analyst reviews in recent weeks – 37 in all, including 30 Buys to 7 Holds for a Strong Buy consensus rating. The shares are currently trading for $157.73 and their $165.98 average target price suggests a 12-month increase of 5%. (See GOOGL stock forecast)
Meta Platforms
Next up is Meta Platforms, another company that most of us are familiar with. Whereas Alphabet is the leader in the global search engine niche, Meta is a leader in social media. The company’s chief subsidiaries are Facebook, Instagram, WhatsApp, and Messenger, popular apps that have made Meta a Mag 7 stock and pushed the company into the ranks of trillion-dollar market caps. Meta has a market cap valuation of $1.3 trillion, making it the world’s sixth-largest public firm.
Meta’s social media business is all about reach, building an audience, and keeping people’s interest, creating apps that they will use and keeping them connected. The company has proven itself successful in this regard, and its success is easily measured by the raw count of its audience. Looking at Meta’s audience numbers, we find that the company reported a DAP, or family daily active people, of 3.19 billion at the end of 4Q23, and an MAP, or family monthly active people, of 3.34 billion for the same period. These are total numbers across all of Meta’s platforms and show that the company had reached nearly half of the total global population of 8.1 billion.
The company’s leading platform, Facebook, makes up the larger portion of its audience. FB’s daily active users, or DAU, were 2.11 billion as of December 31 last year, and the monthly active users, MAU, came to 3.07 billion. These numbers likely overstate the gap between Facebook and its sibling social media apps, as there is considerable audience overlap among them.
Having such strong audience numbers provides solid support for Meta’s digital advertising business, which brings in the bulk of the company’s revenues. In its last reported quarter, 4Q23, Meta reported $38.7 billion in ad revenues, out of a total revenue of $40.1 billion. The quarterly ad revenue was up 23.6% year-over-year, and the total revenue was up 24.5% year-over-year, solid gains that indicate strong annual growth. The company’s revenues brought it $5.33 in earnings per share, a total that was 39 cents per share better than had been forecast.
Checking in again with Wedbush’s Devitt, we find the analyst upbeat here, based on Meta’s predicted strength in the coming months. Devitt says of the social media giant, “Meta provided notably strong forward guidance for 1Q (+20-29% Y/Y growth) and we are raising our estimates to the high end of the range (~2% above consensus) given positive feedback from advertisers in our survey work and healthy underlying demand trends with particular strength in the social vertical. We are primarily focused on (1) the pace of expected growth in 2Q and 2H24 against more challenging comps, (2) continued monetization improvements across Reels, click-to-message, and Advantage+ campaigns, (3) potential changes in demand from China-based advertisers, (4) progress on AI initiatives and associated capex spend, and (5) the pace of operating margin expansion in 2024 and any changes to management’s total expense outlook for the full year.”
These comments back up Devitt’s Outperform (i.e. Buy) rating on META shares. His price target, set at $570, indicates room for an 11% share price gain on the one-year time horizon.
That’s far from the only bullish view on Meta stock. The 43 recent analyst reviews here break down to 40 Buys, 2 Holds, and 1 Sell, for a Strong Buy consensus rating. However, the current average target price, at $533.24, implies a one-year upside potential of a modest 4%. (See Meta stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
