BofA seeks ways forward through 'choppy' advertising-market waters
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Pick your metaphor for the advertising market, with a broad macroeconomic slowdown looming: BofA sees "storm clouds developing," and generally looks to "choppy waters" ahead.
Companies that spend into a recession often come out stronger, analyst Jessica Reif Ehrlich noted - but the market is full of worried advertisers fretting over labor shortages, supply-chain challenges, and the specter of soaring inflation.
Snap (SNAP) cast a pall over the digital-ad space (not to mention the broader market) a month ago when it warned that it would miss the low end of its Q2 guidance after "the macroeconomic environment has deteriorated further and faster than anticipated."
Add to that more specific concerns, Reif Ehrlich pointed out: Some ad verticals are "softening," like leisure and dining, although there are potential tailwinds with an uptick in theatrical releases, and political advertising will provide a second-half lift. Traditional media companies seem to be reaching for share coming out of upfront ad season, which could mean rates will be flat (vs. increases last year of 18-20%).
Meanwhile, Amazon.com (NASDAQ:AMZN) is increasingly becoming a threat to traditional media, tapping significant targeting to build on a $30 billion advertising business, she pointed out.
Still, there are pockets of light for investors navigating the way forward. "The more intermediate term opportunity in streaming is encouraging," Reif Ehrlich said. "Streaming provides incremental reach particularly in demos that are not as easily captured with linear television along with addressable capabilities that provide opportunity for TV to capture down-the-funnel budgets."
The hotter competitive landscape in streaming has pushed hefty increases in content spending globally as well as churn for leaders like Netflix (NASDAQ:NFLX) - and that content spending will keep going up, if at a moderating rate, she said.
And that should help operators who already have big content libraries, notably Warner Bros. Discovery (NASDAQ:WBD), as "the focus on profitability and (free cash flow) replaces subs as the primary investor priority."
Ad-supported video on demand models have the potential to re-accelerate growth through new monetization, though those with prior ad core competencies will more easily transition, Reif Ehrlich says (platforms like Netflix (NFLX) may need time to acquire AVOD streaming rights for licensed content, along with developing an ad-tech sales infrastructure).
Turning to music, after a frenzy in publishing rights over the past couple of years, net publisher share multiples are "contracting quickly," and buyers are shifting to "harvest mode" to exploit rights aggressively. That trend plays for Spotify (SPOT), which pointed out at its recent Investor Day that it has significant pricing power - though Reif Ehrlich said that Spotify will likely wait for a better macro backdrop to initiate price increases, "particularly considering emerging markets still provide an enormous engine for growth."
As for sports content, media companies that rent such content are facing pressure amid growing price escalation for rights along with the viewer shift toward streaming from linear platforms, she said - contrast the controllable expenses of news content with the rented sports costs that are subject to "massive" increases.
The latest big increase for rights came with Apple's (AAPL) 10-year Major League Soccer deal, she noted, with average annual value of $250 million.
The next big league up for rights renewal is the National Basketball Association - and "we believe it is possible that Turner (WBD) and ESPN (NYSE:DIS) will strive to reach an innovative agreement/JV with the league that better aligns the interest of all stakeholders."
Shifting rights to direct-to-consumer platforms trades significant revenue potential for more limited reach, she noted, but "in order to maintain younger fan bases, leagues will likely need to lean into streaming in some fashion."
Cowen's John Blackledge, for one, sees heavy upside for Netflix (NFLX) in moving to the ad-supported world.