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The Best Stocks to Play Digital Advertising

How will the pandemic continue to affect this space?

Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.

While it has bounced back from the pandemic, total advertising spending will likely decline in 2020. We expect the market will return to solid growth next year, though, powered by the expansion of e-commerce and consumer time spent online that the pandemic has fueled, coupled with a return to economic growth.

We believe higher digital ad spending will drive advertising budgets higher throughout 2024, leaving traditional ad channels like television competing for a stagnant revenue pool.

However, in our view, rosy growth expectations for the digital advertising market are already priced into the stocks of the major players in this industry.

We view Snap (SNAP) as particularly overvalued. While the firm has expanded its offerings and is attracting direct-response and brand advertisers, it serves a narrow segment of online users, which we think will limit ad dollars allocated to it in the long-run.

With users who often have an intent to purchase, we expect Pinterest (PINS) to attract more direct-response and brand advertisers. Nonetheless, we think Pinterest’s stock is overvalued.

Spotify (SPOT) has also made smart moves recently, quickly gaining traction in the podcast market. We expect its ad revenue growth to outpace subscriber revenue and help create operating leverage, but again we believe those assumptions are already accounted for in the current stock price.

We view Twitter as fairly valued. While it will benefit from the return of live events following the pandemic, which should attract brand advertisers, the firm continues to struggle with its direct-response offering.

For investors who want exposure to growing digital ad demand, that leaves Facebook (FB) and Alphabet (GOOGL), both of which we think are reasonably valued and very well positioned. The firms have developed strong network effect platforms that not only have more users and viewers than competitors but also continue to develop more ad offerings that further attract upper- and lower-funnel marketers. While Alphabet and Facebook will continue to face regulatory and antitrust risks, we believe the risks are manageable and won't detract from either firm's value over the long term.

Senior analyst Ali Mogharabi provided the research behind this segment.

Morningstar does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.