Since Halloween, the stock market has been on a torrid rally. While most investors have been focused on AI stocks during this frenetic rally, I’m here to tell you that AI stocks have not been the market’s biggest winners in this recent run-up — that title belongs to digital advertising stocks.
To be clear, AI stocks have been outperforming the market. The S&P 500 is up about 14% since January, while the Artificial Intelligence ETF (AIQ) has risen almost 20%. AI stocks have indeed been strong performers.
But ad stocks have done better.
Ad tech companies like PubMatic (PUBM) and Magnite (MGNI) have each seen increases of more than 40% since late October. Meanwhile, the digital ad platform Pinterest (PINS) has climbed more than 50%. Its peer, Snap (SNAP), has performed even better, soaring almost 80% since late October.
Across the board, digital ad stocks are on fire.
We think they’re going to stay hot throughout 2024, and those that leverage AI in their business will see especially torrid rallies.
Surge in Digital Advertising Stocks
You have to ask yourself: why are digital ad stocks suddenly soaring at the end of the year?
The outlook for ad spending next year has suddenly and dramatically improved. Seemingly out of nowhere, it now looks like 2024 will be a huge rebound year for the digital ad market.
It all stems from the consumer.
Ad dollars follow consumer spending. Everyone thought the consumer was going to roll over in 2023 and maybe even weaken further in 2024. Consequently, it was assumed that the ad market would also decline in 2023 and 2024.
But the opposite is happening.
The consumer isn’t rolling over. Buoyed by a strong labor market, rising wages, falling inflation, falling interest rates, and rising sentiment, the consumer continues to spend.
In the past few weeks, the economic outlook for 2024 has significantly improved, lending credence to the idea that consumer spending will persist into next year.
If consumers maintain their spending habits, brands will continue to invest in advertising.
This is evidenced by the actions of leading market research firm Dentsu, which, less than two weeks ago, meaningfully upgraded their forecasts for global advertising spending in 2024.
Global advertising spending rose just 2.7% in 2023. It is now expected to increase by nearly 5% in 2024, almost doubling the growth rate recorded this year.
In other words, the global ad spending market is expected to grow twice as fast next year as it did this year.
The bulk of this growth will come from digital advertising, and more specifically, connected TV advertising. With major media platforms like Netflix (NFLX) launching and/or redefining their connected TV ad offerings in 2024, Dentsu anticipates the connected TV advertising market to grow by more than 30% in 2024, compared to just 16% growth in 2023.
The Final Word on Ad Stocks
These boosted forecasts for ad spending next year are why digital ad stocks have been on fire over the past few weeks—and why they’ll remain hot for the next several months.
Looking at the valuations across various digital ad stocks, we find some significantly discounted valuations.
For example, SNAP stock is trading at 5.3X forward sales, which is more than 45% below its five-year average sales multiple of 9.9X.
Another popular digital ad stock, The Trade Desk (TTD), is trading 32% below its five-year average forward earnings multiple.
Roku (ROKU), which makes most of its money selling ads through its connected TV platform, is trading more than 55% below its five-year average forward revenue multiple.
We are seeing very discounted valuations across the board in the digital ad sector.
This means that these stocks could soar in 2024 if the digital ad market rebounds as much as recent forecasts suggest.
We’re very bullish on digital ad stocks right now.
We think you should be too.
In particular, we are bullish on the digital ad stocks that are best at leveraging AI across their businesses to create more effective advertising campaigns.
These will be the best-performing digital ad stocks of 2024.
Which top-performing digital ad stocks are we most excited about for next year? Click here to find out.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
