Q1 '21 Digital Ad Trends – The Industry Re-Acceleration Continues

As we completed our quarterly digital ad checks, a few narratives emerged: 1) overall digital ad spend continues a faster-than-expected recovery, with some budgets at-orexceeding pre-COVID levels in Q1; 2) positive auction dynamics are driving strong price inflation; 3) advertiser vertical performance remains bifurcated, with some initial signs of spend from under-performing verticals in 2020 (travel, restaurants/leisure, etc.) poised to return inline with improving end demand trends; & 4) brand ad spend continues to recover from a mid-2020 bottoming. In particular, we see particular strength in our industry checks for Google search, YouTube, Facebook pricing & Pinterest ad budget momentum.

2021 Themes – Privacy Headwinds vs. Shifts to Social Commerce

Over the next 12-18 months, we see two counteracting themes as front/center in investor debates. As a headwind, we highlight both regulatory & third-party platforms' moves to enhance user privacy and limit data collection. Overall, while no one single development is likely to cause significant changes to digital ad company business models, we think the compounding effect creates broader industry headwinds that will need to be overcome through product innovation. In this note, we analyze Apple's iOS 14 privacy changes & Google's recent Chrome browser announcements. On a positive note, we see continued momentum (based on consumer behavior shifts toward eCommerce) around a theme we have called “blurring the lines” (between eCommerce & advertising models) and examine some of the platform and product innovation by companies under our coverage to tap into this secular growth theme.

How Are We Framing The Stocks From Here?

Looking ahead to ‘21, we have a preference for large cap over SMID cap digital ad names in terms of risk/reward. GOOG & FB both trade at compelling multiples to growth, have more recently lagged SMID cap peers (last 6 months) and we see fears on regulatory as overdone. Among the SMID cap names, our pecking order remains PINS, SNAP & TWTR. We adjust our operating estimates for our digital ad checks and remain above the Street on revenue estimates across the board. We also adjust oper ests for TWTR to reflect its recent investor day and increase our PT from $60 to $68. Our EPS changes for TWTR, SNAP & PINS are a result of our updated operating estimates.