Caris & Company analyst Tim Boyd addresses clients on the strong growth in U.S. internet advertising revenue in 2Q'06, positively affecting companies like Yahoo! (NASDAQ:YHOO) and Google (NASDAQ:GOOG). His note follows:
The Interactive Advertising Bureau [IAB] and PricewaterhouseCoopers [PwC] announced yesterday that 2Q06 U.S. Internet advertising revenues grew 36% Y/Y to a new record of $4.1B. Although this represents a modest deceleration from the 38% growth seen in 1Q06, we note that revenue growth for the full year 2006 is on track to accelerate to 35% (our estimate) from 30% in 2005.
U.S. Internet Advertising: Strong Growth Continues
In terms of revenue share among the various Internet advertising media/formats, the IAB’s latest data indicate that classifieds and referrals/lead generation (i.e., an auto dealer pays a fee in exchange for receiving a qualified purchase inquiry online) increased their share in 1H06 at the expense of display. Meanwhile, search and e-mail maintained their respective shares.
U.S. Internet Advertising: Revenue Share by Medium
Although this data is backward looking, we do not find it surprising that less money is being spent on display advertising. Indeed, Yahoo!’s disappointing 3Q06 pre-announcement was, in our view, largely due to weakness in its display advertising business.
As an aside, we note that eMarketer announced yesterday that it will be reducing its 2006, 2007 and 2008 estimates of total online advertising spend. Although the full details of these reductions will not be available until later this week, we have gathered that the 2006 estimate will be lowered from $16.7B to “somewhere in the $15B range”, which we interpret to mean a 5% to 10% downward revision. Although a reduction of this magnitude is nothing to sneeze at, we believe that any decrease in online ad spend will be the result of money being pulled from ad servers and formats that are not delivering a competitive ROI rather than a wholesale withdrawal of money from the market. In other words, we do not expect to see advertisers spending less on ad platforms that are delivering a consistently high ROI, such as Google AdWords.
At the margin, we view the IAB data as supportive of our thesis on Internet advertising and reaffirm our bullish view on the sector.
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