Saksit Sangtong
Morgan Stanley expects advertising spending growth to accelerate in 2024, while separately upgrading Omnicom (NYSE:OMC) and raising the price target on several players in the space.
The analysts said that they are modestly above consensus in 2024 in overall U.S. advertising spending led by digital (about 75% of the overall U.S. market).
They recommended stocks where there are structural growth drivers — Amazon (AMZN), Meta Platforms (META), Alphabet's (GOOG) (GOOGL) Google — or where the analysts have a differentiated earnings view and/or valuation is compelling.
The analysts noted that they remain cautious where they see structural advertising pressures — Paramount Global (PARA), AMC Networks (AMCX) and iHeartMedia (IHRT) — or where they see valuation as particularly stretched Roku (ROKU) relative to competitive risks.
Advertising Outlook in 2024
The analysts said their company bottom-up forecast indicates about 10% U.S. advertising growth in 2024, or 7% excluding the benefits of political and Olympic spending.
This is modestly ahead of consensus due to higher online ad estimates. They model U.S. online advertising growth to accelerate to about 12.5% in 2024 (from around 8% in 2023).
At a high level, the analysts continue to expect performance-based advertising and leading (and still improving) targeting, relevancy and conversion to drive commerce online, and for ad dollars to follow transactions.
The U.S. e-commerce forecast (which helps them in their online ad forecast) calls for 10% year-over-year growth in 2024 (versus around 8% in 2023).
While the analysts expect some smaller platforms — such as Snap (SNAP) and Pinterest (PINS) — to accelerate in 2024 off of easy compares and as their platforms improve, they see Google, Meta, and Amazon in total driving around 78% of overall U.S. online ad dollar growth.
The analysts see Amazon's introduction of ads for Prime Video as an incremental lever to steer online ad growth in 2024. They have sized the Prime Video U.S. ad opportunity at about $5B for Amazon by 2025, although this revenue is not currently included in the analysts' Amazon's base case.
The analysts noted that after Amazon's introduction of Prime Video ads, they will also monitor the extent to which Prime Video budgets are incremental or cannibalistic to existing digital, television, and Connected TV, or CTV, ad spend.
Prime Video's shift into advertising likely accelerates the ad dollar shift from TV to CTV, but represents new competition for companies like Roku and Vizio, the analysts added.
The analysts expect Prime Video shifting its viewers to an ad supported service in the U.S. (with an opt-out model) combined with its already large advertising scale and service capabilities to have a bigger impact on the existing CTV players in 2024 than Netflix (NFLX) and Disney (DIS) had upon their launch in 2023.
The $5B opportunity cited would represent 20% of the analysts' 2024 CTV forecast and is 60% larger than Roku and Vizio ad revenues combined in 2024. They forecast CTV growth ex-YouTube to accelerate from 14% to 17.5% in next year but see increased competition given the increase in supply from Prime Video.
Omnicom (OMC) Upgrade:
The analysts upgraded Omnicom (OMC) to Overweight from Equal-weight and raised the price target to $100 from $90.
The analysts see upside to organic growth estimates for 2024 at 3% with a realistic bull case of 5.5%. They expect continued strong growth in media (about 50% of revenues) buoyed by retail media (Total addressable market, or TAM, expander) and CTV growth in 2024.
The analysts anticipate a rebound in Tech vertical marketing and the strong political spending environment to accelerate other disciplines, notably Precision Marketing and PR. At an 11% Free cash flow, or FCF yield and 11x P/'24E EPS, the analysts like the risk/reward skew on this out of consensus idea.
Price Targets
Morgan Stanley raised the price targets of Roku (ROKU) to $65 from $55, Interpublic Group (IPG) to $35 from $33, Vizio (VZIO) to $8 from $7, Lamar Advertising (LAMR) to $105 from $95, and Outfront Media (OUT) to $13 from $12. Meanwhile, the firm lowered the price target of iHeartMedia (IHRT) to $2 from $3.
Omnicom (OMC) has a Hold rating at Seeking Alpha's Quant Rating system, which consistently beats the market. Meanwhile, the Seeking Alpha authors' (2 authors in this case) average rating is also Hold but the average Wall Street analysts' rating is more positive with a Buy.