Advertising Market: Why to Buy Big Tech, Sell Snap and Pinterest

The second quarter of this year has witnessed a resurgence in advertising revenue, which serves as a crucial indicator of the US economy. The increased ad spending signifies businesses' eagerness to expand and grow, suggesting a positive outlook for the near future economy. Consequently, the growth in advertising revenue in the latest quarter compared to the same period last year is a promising sign, further increasing the likelihood of a soft landing in the economy.

I have assembled a list of six internet companies that generate substantial revenue from advertising, with the majority being social media platforms. However, Google Search and Amazon stand out as exceptions. Amazon, in particular, is an outlier because although advertising is not its primary source of revenue, it has experienced rapid growth in this area.

Among the six companies analyzed, Amazon's advertising revenue exhibited an exceptional growth rate of 22% compared to the previous year, marking the highest growth rate of all. In contrast, Meta experienced the second-highest growth rate at 11%, meaning that Amazon's growth rate was twice that of Meta's.

What's more, Amazon's ad revenue has now far exceeded that of YouTube and accounts for approximately one-third of Meta's latest quarterly revenue. This indicates that third-party sellers on Amazon's marketplace are aggressively investing in advertisements to gain a competitive edge against other sellers, resulting in substantial profits for Amazon. Amazon is undoubtedly reaping the benefits of this lucrative situation.

While Amazon's overall company guidance for the next quarter's year-on-year revenue growth ranges from 9% to 13%, it is important to note that this guidance is for the entire company and not specific to Amazon Ads. In my view, the growth potential for Amazon Ads is likely to be even higher, possibly achieving another impressive 20% growth rate. As a result, the advertising segment has the potential to become a significant revenue driver for Amazon, following closely behind the revenue generated from its ecommerce and AWS divisions.

Meta emerged as another major success story, experiencing double-digit revenue growth of 11%. The company provided an optimistic outlook, forecasting an impressive year-on-year revenue growth increase of 15% to 24% for the next quarter. As a result of its strong performance, Meta achieved the best year-to-date gain of 149% among the companies mentioned here.

Snap emerged as the weakest performer, being the only one to witness a decline in revenue. The management anticipates this downward trend to persist into the next quarter, with an expected year-on-year revenue decline of 5%. This is disappointing because even Pinterest, with its lower revenue, managed to demonstrate growth during the same period.

Despite both having relatively lower revenues, with figures around $1 billion or less, both Snap and Pinterest should ideally be experiencing rapid growth by capturing market share in the advertising space. However, they are showing slower growth compared to larger players in the industry. This situation is worrisome as it indicates that the bigger players are outpacing them in capturing the growth in online advertising. Consequently, Snap and Pinterest are falling behind and facing the risk of becoming obsolete if they cannot catch up with their larger competitors.

The evidence indicates that Snap and Pinterest are trailing behind and may not be promising investment options. Their year-to-date performances with gains ranging between 16% and 22% are notably lower compared to the substantial gains of Alphabet, Meta, and Amazon, which exceeded 44%.

The Big Tech are getting bigger and it makes sense to bet on the leaders and avoid the laggards.