Seeking Alpha

This Is One Of The Greatest Secular Growth Trends

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Includes: AMZN, FB, FSLY, GOOG, GOOGL, NET, ROKU, TTD
by: Louis Stevens
Summary

In this note, I will share the first installment of The Ten Greatest Secular Growth Trends of Our Time.

These are the trends that are shaping the future of the business landscape.

I highlight two companies that will likely come to dominate this industry, which could be worth over a trillion dollars by 2030 (they aren't GOOG and FB).

I will describe in-depth the future advertising channels that currently do not exist, but will likely exist in the future.

Additionally, I will highlight how machine learning and artificial intelligence will further enhance digital advertising, accelerating the digital ad revolution and creating massively winning stocks.

Digital advertising surpassed TV ads in 2016 | CIO

Source: cio.com

Introduction

The Ten Greatest Secular Growth Trends of Our Time is a system of investment that I used throughout the 2010s with great success. Now that we've begun the 2020s, I am again surveying the landscape of earth's business landscape.

In this note, I will review what I believe to be one of the greatest secular growth trends of our time. This is one that's been underway in earnest for the last ten years, but I see it being a highly lucrative trend for at least the next decade or two.

As I wrote in a recent article, in which I described Roku (NASDAQ:ROKU) as the future of TV Operating Systems,

I find it important to view investing through multiple lenses. It's important to take your head from the microscope of individual stock analysis and survey the landscape that's unfolding around you. Having the wherewithal to assess the directions of the currents of change is as essential as having the wherewithal to weigh the value of an individual company, i.e., stock.

I like to think of my team and myself as scientists with two primary tools in hand: a microscope for businesses and a telescope for mankind's future. Our microscope allows us to avoid overpaying and our telescope allows us to glimpse into the future of business to ensure we're buying the next Apples (NASDAQ:AAPL), Amazons (NASDAQ:AMZN), and Facebooks (NASDAQ:FB).

The Ten Greatest Secular Growth Trends of Our Time very nicely epitomizes this philosophy, or strategy, by which to invest.

So, without further ado, here's the future of digital advertising and how you can play it!

Let's Get Started: Setting The Stage

Here's a quick glossary:

  • Digital/programmatic/target ads: These are essentially three different sides of the same coin. These terms refer to the idea that digital ads are bought and sold based on real-time data on exchanges where supply and demand determine the cost of an ad.
  • Sensory nerve endings: By this, I mean digital advertising channels will "touch" the individuals to whom the advertisements are shown, then send a signal to the "central ad intelligence" regarding the individual's experience with that ad.
  • Central ad intelligence: This is the platform where marketers go to deploy their ad dollars, i.e., Facebook's (NASDAQ:FB) Demand Side Platform [DSP], The Trade Desk's (NASDAQ:TTD) DSP, or Roku's DSP, etc. The platform becomes more intelligent as more people deploy ad dollars and more individuals experience the ads the platform shows.

The 3rd Inning Of An Incredible Secular Growth Trend

The transition from traditional advertising, defined as advertising that does not employ digital exchanges or algorithms/machine learning to determine ad placements, to digital/programmatic advertising is one of the greatest secular growth trends of our time.

While it has been highly touted through Facebook and Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), the importance of it, why it's important, and how it will evolve often remains underexplained and/or underappreciated.

It is often said that data is the oil of the 21st century, and artificial intelligence is the electricity generated by that data. If those are both true, then digital advertising is one incarnation of data refined by artificial intelligence that will be used as fuel to power the growth of businesses throughout the 21st century.

Facebook and Alphabet (containing Google and YouTube) should be seen as the initial case studies for how profitable this industry can be, and while Facebook and Google remain fantastic investments, they won't be the only companies that will profit massively from the accelerating digital ads secular growth trend.

Surveying The Market

Source: Statista - The Statistics Portal

As can be seen above, digital advertising demand has been growing rapidly, especially over the last 5 years. Notwithstanding, there's still hundreds of billions going to "dumb advertising channels" (as opposed to "smart advertising channels" that are based on machine learning algorithms that place ads in locations and at times with the greatest ROI).

Source: statista.com

As can be seen above, digital hasn't yet killed traditional ad spend yet, but it will. And someone might say,

"Well, it won't kill traditional or linear TV entirely because the ads will just be transported onto TV operating systems where people will watch ad-supported TV as they always have".

While this is a true statement insofar as TV ads will still exist via the likes of connected TV on a TV operating system, it ignores what's so special about digital ads, and why it will remain an explosive and highly profitable investment narrative for at least the next decade.

The Proliferation Of Smart Advertising Channels

The number of advertising channels will proliferate immensely. With edge computing platforms evolving (i.e., Cloudflare (NET) and Fastly (FSLY)), 5G technology deploying, and applications operating with basically zero latency expanding in number, earth and the business community will witness an explosion in digital/programmatic advertising channels. And all of these channels will act as the sensory nerve endings in a nervous system connected to a "central ad intelligence".

Examples of future sensory nerve endings, i.e., advertising channels, might include:

  • digital billboards, digital endcaps in grocery stores, augmented reality advertising channels shown through AR glasses, digital advertising within autonomous vehicles, digital advertising in small business retail stores, digital advertising in virtual realities, digital advertising on apps that monitor your location and deploy ads around you based on the app your using and your current location, and digital advertising in many more unique ways we can't even imagine yet.

And all of these channels will be linked to a "central ad intelligence". The central ad intelligence will analyze its sensory nerve endings' interactions with individuals in the outside world or in virtual realities who will carry with them a digital footprint (read: iPhone or AR glasses and associated data), which we all already have as of today; hence, our ability to experience targeted digital ads.

So, as this central ad intelligence continues to interact with its world, whether it be virtual or our physical world, it will become more intelligent, and as it becomes more intelligent, its ability to influence our purchasing decisions/patterns will also increase. This will create extraordinarily higher ROI on ad dollars spent by advertisers, which is already extraordinarily higher with the advent of target/programmatic/digital ads, which you can read about here.

There will be massive networks of intelligent digital advertising channels, and they will be capable of determining who you are and what you need to see for the customers (businesses spending their ad budget) of these networks to get the most bang for their buck.

Example Of Our Future Ad Overlords In Action

Here's an example of how this will actually look in the future.

Let's say Ashley wakes up one day and wants to go to the mall (granted virtual reality changing rooms do not eliminate the need for malls...). She first checks her social media accounts, where she's shown an ad for sandals. She clicks the ad and browses for a bit, but decides not to buy online. She wants to check it out physically in a store.

So, she gets ready and hails an autonomous taxi. In the taxi, there's one ad played for every ride, and because there's a central digital advertising intelligence, she's again shown an ad for the same sandals, which she browsed upon waking up earlier that day.

Now, if you're a marketing expert or have owned a business in your life, you're likely aware of the rule of 7, in which a consumer must be touched by an ad at least 7 times before they decide to make a purchase. Of course, this is a rough rule, but spirit of the rule rings true. So, now, Ashley has been exposed to these sandals a couple times before she has even gotten to the mall.

As Ashley approaches the mall door, there's a digital sign hanging adjacent to the door. Because she'd expressed interest in the sandals earlier that day, she is now being shown the same ad yet again, because the central ad intelligence has its sensory nerve endings deployed almost universally. It knew what she looked at earlier that morning, and it is now deploying an ad through a WiFi-enabled digital sign.

Of course, you might think, "What if there are 100 people around the door?" Then, the central ad intelligence would be able to use statistical analysis to determine which ad should be shown based on the demographics of the people surrounding that digital sign.

Lastly, as Ashley enters into the shoe store, a digital sign is flashing a series of different advertisements, but lo and behold, as she enters, she is again shown the advertisement for the sandals in which she expressed interest 4 hours before lying in her bed.

Ashley sees the ad and thinks "Hey, I've seen those around! I should try them on." And boom, the intelligent advertising revolution gets Ashley in a nice new pair of sandals, makes the ad platform money, and at the end of the day, makes shareholders wealthier.

Further Exploring The Digital Ad Landscape

In the following sections, I will cover:

  1. An analysis of the present digital ad market.
  2. An analysis of how artificial intelligence and machine learning will accelerate the growth of digital advertising.
  3. Lastly, I will share 2 stock picks and highlight some strengths of these businesses.

The Digital Ad Market

The digital ad market has experienced explosive growth over the past ten years; however, it still has much, much more room to grow over the next ten. As more advertising channels come about (other than TV operating systems, social media, websites, online radio, and search), the industry will evolve into a trillion-dollar-plus global industry.

For now, we have hundreds of billions of dollars' worth of digital ad spend on which we can capitalize.

Source: emarketer.com

As can be seen above, digital ad spend is set to reach $517B by 2023. It will also still be growing in the high single digits according to this often-cited report. I believe that the growth will either re-accelerate (due to the proliferation of sensory nerve endings, aka ad channels, and smarter central ad intelligences, aka DSPs) or maintain that high single-digit growth rate into the late 2020s.

To further elaborate the extent to which this industry is exploding, I will again share the following chart, which highlights the growth of digital ad spend in relation to TV ad spend; the size of which continues to boggle my mind because I am someone who stopped watching linear television in 2010. So, I might not be representative of at least half the world's population.

Source: Statista - The Statistics Portal

And here's another graph that further highlights this seismic shift:

Source: emarketer.com

So, we now know that this industry is incredibly lucrative and that it is set to continue to grow at a rapid pace, relatively speaking, throughout the 2020s.

Now, let's assess how the industry will grow based on concepts on which I am laser-focused, such as machine learning and artificial intelligence.

The Acceleration Of Machine Learning And Artificial Intelligence

By now, it probably seems pretty obvious that machine learning and artificial intelligence will be at the center of this digital ad revolution. In order to quickly assess the viewer of the ad as they walk down the street, there must be massive data processing power instantly deployed from the edge cloud (hello, FSLY and NET) as the viewer walks by (at scale, tens or hundreds of millions of viewers globally).

And as more and more interactions occur over the coming decades, the ROI on the deployment of digital ads will increase as well. Artificial intelligence will be no different than human intelligence at some point (this is known as the singularity by some) in that the ad AI will become better and better at the job which it is tasked to do. These central ad intelligences will get better and better each moment of every day at showing the right ad to the right person; thereby, generating higher and higher ROI for its customers.

In the above charts, you still see the existence of ad dollars being deployed through "dumb channels" (as opposed to "intelligent digital ad channels") decrease. This number will evaporate over the coming decade, as alongside machine learning and AI, digital ads will become so superior that it would be financial insanity to deploy money through traditional advertising channels.

So, How Should We Play This Revolution?

Today, I will highlight 2 businesses that are currently profiting from this revolution and should continue to do so throughout the 2020s. I will highlight exactly how these companies are involving themselves within the digital ad revolution. These companies are:

  1. ROKU
  2. AMZN

Roku's Demand Side Platform And TV Operating System

Roku recently began its path towards becoming a digital ad giant, which I believe it will become as years pass. It did this by acquiring one of the top demand side platforms: dataxu.

According to marketing.toolbox.com, dataxu's TouchPoint DSP is one of the best in the business.

The dataxu’s TouchPoint DSP claims access to over three trillion global ad impressions through open and private ad exchanges.

And, here are the main types of digital ads handled by Roku's new shiny DSP as well as some capabilities:

  • Types of Inventory: Display, native, mobile, social, audio, digital out-of-home (DOOH), digital video, connected TV, addressable TV, and game consoles
  • Targeting Capabilities: Prospecting, third-party data, contextual and site targeting, dynamic retargeting, geofencing, geotargeting, IP targeting, and weather-triggered delivery
  • Reporting: API access to dataxu’s ClearSight analytics platform

Roku's recent 10-Q sheds further light on this acquisition and its progress/place within the company.

dataxu is a demand-side platform (“DSP”) that enables marketers to plan and buy video ad campaigns. The acquisition of dataxu’s platform complements the Company’s OTT advertising platform and enables marketers to access a single, data-driven software solution to plan, buy, and optimize their ad spend across TV and OTT providers.

Platform revenue increased by $175.5 million, or 58%, during the six months ended June 30, 2020 compared to the six months ended June 30, 2019. The increase is mainly attributable to higher content distribution revenue and related transactional revenue, including Premium Subscriptions, in addition to advertising revenue, which includes revenue from dataxu which we acquired in November 2019.

Source: Roku's 10-Q

The primary thrust of the acquisition according to Roku is to provide advertisers a cockpit for deploying ads on the most popular connected TV, streaming operating system on earth.

Source: substack.com

In my most recent article on Roku entitled, "Roku: The Future Of TV Operating Systems", I shared the following quote:

According to Roku's management, its TAM is the entirety of US TV advertising spend (~$70 billion). In addition to that, international markets provide Roku a multi-decade long growth runway.

As Roku's TV Operating Systems gains international traction, and as it begins to offer services outside of simply content streaming and ad-supported TV, i.e., potentially ad-supported gaming, its ad business should explode in value.

Amazon Advertising

Amazon (NASDAQ:AMZN) advertising in many ways led me to the understanding I have today of the future of digital advertising. From both a financial perspective (which I will highlight) and from a use case perspective, Amazon's advertising business illuminated to me the future of digital advertising; in the sense that Amazon's DSP will direct ads to numerous channels (sensory nerve endings) in the future.

From the core retail site, to its voice-controlled Alexa, to its Fire TV Operating System, to its physical retail stores, where I believe they will inevitably start showing digital/programmatic advertising based on a users' unique Amazon profile/footprint, Amazon will be a true revolutionary in the digital ads space in terms of its omnichannel deployment of targeted/digital ads.

After a thorough investigation of it (dating back years), I realized that Amazon would become primarily an ads business in terms of profits it would derive from its commerce platforms.

Amazon

Source: Business Insider

Not even the great Jeff Bezos can escape the secular growth trend of digital ads as arguably the most profitable secular growth trend of our time! In this article, I detailed my contention that Amazon's DSP reveals that it could be worth more than the entire company's present value by 2030.

And by now, after all of the discussion we've had regarding intelligent digital advertising, I think it's pretty obvious that such a valuation could be easily achieved.

Concluding Thoughts

The digital ad revolution truly is in its initial stages. I would say it's about in its 3rd inning, as incredible as that may sound with Alphabet and Facebook at close to $1T+ valuations.

As the number of channels for ads continues to proliferate as cities become more intelligent via new technologies such as 5G, artificial intelligence, and edge computing, the digital ads revolution will continue to pick up steam.

They say data is the oil of the 21st century, and to invest in data would be a wise method to generate ROI, but I believe there's an underappreciation for the extent to which the digital ad revolution is creating companies that have outstripped the size of even the largest oil giants of the 20th century.

While there are still decades during which this field will evolve, investing in companies at the heart of this trend will surely result in substantial returns for the decade ahead.

And Roku and Amazon are just two ways to play it!

As always, thanks for reading; remember to follow for more, and happy investing!

Disclosure: I am/we are long ROKU, TTD, AMZN, FB, GOOG, FSLY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.