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WPP Focuses on Integrating Tech and Creativity

We think the ad holding company continues to differentiate itself.

WPP WPP highlighted its data, technology, and creative capabilities during its recent analyst day. While the narrow-moat company has not made aggressive acquisitions on the data and data management front (unlike peers Interpublic IPG and Publicis), it has access to first- and third-party data through its clients and various partners, including Kantar, which WPP sold to Bain Capital. Regarding technology, management remained confident in WPP’s chances of winning accounts when facing consulting companies. The company also highlighted the enhancement of its creativity by further investing in artificial intelligence. In our view, that know-how combined with the company’s long-standing leadership in creativity, which has helped strengthen its brand equity moat source, will continue to differentiate WPP.

We think WPP is well positioned to benefit from continuing growth in online ad spending. It and its peers may also benefit from the increasing demand for data privacy and security. Management did not touch on fourth-quarter results or 2020 guidance; it will publish its earnings in late February. We have not made any adjustments to our model or our fair value estimate. This 4-star stock increased nearly 34% in 2019, above the S&P 500’s 29% and the Communication Services Select Sector SPDR Fund’s 31%.

Regarding data, WPP’s strategy is based on the assumption that ad return on investment is more likely maximized if the creativity and media buying is based on access to and integration of data from different sources. In our view, this strategy is welcomed by advertisers and publishers as they prefer reducing dependency on data from Google or Facebook. Those larger online media owners have already begun to further restrict access to their data due to increasing demand from users and lawmakers for data privacy and security. Google’s announcement that it intends to eliminate third-party cookies in its Chrome browser is the latest move in that direction.

In addition, we think that given the need to integrate and manage data from many different data sources, advertisers may hesitate to bring the necessary but costly marketing data management technology in house and may give more of that responsibility to agencies, which bodes well for WPP. The company has preferential access to data from Google, Amazon, LinkedIn, IBM, and its recently sold asset, Kantar.

While WPP’s expertise in technology is not surprising, we were impressed that the company is making additional investments to enhance creativity directly. For example, by partnering with technology companies like Microsoft and Adobe, WPP is working on integrating AI technology with its creative agencies. Over time, this is likely to increase productivity of its creative teams by shortening the process of design and production. It should also allow those teams to quickly test many more ideas and scenarios and better estimate their potential returns. WPP is already working on such dynamic creative optimization with partners like Facebook, Amazon, and Snap. The company is also further investing in enabling marketing and advertising within emerging content types, including augmented and virtual reality and esports content.

WPP remains active in other areas in technology, including providing services that help clients quickly implement and integrate new technology. In addition to having creativity as its main and effective differentiator, we think WPP will do fine when competing with consulting companies like Accenture on digital transformation. As management said, WPP is still one of the top marketing technology system integration partners of Adobe and Salesforce.

With such a focus on technology, we were pleased to hear that WPP will make all of its innovation available to all agencies throughout the company on one platform, WPP Open. In our view, this strategy will help the company operate more efficiently, possibly creating further operating leverage.

In addition to strong technology and data partnerships with big techs such as Google, which is also a client of WPP, the company highlighted clients including Amazon, Facebook, Uber, Netflix, and Ford. We were pleased to see Ford mentioned as a valuable client, given that WPP lost that creative account to Omnicom’s OMC BBDO in late 2018. However, WPP did maintain the media side of that account. During the presentation, WPP explained how it had applied its creativity and technology expertise to design the FordPass app, which according to WPP has 6 million global users and is adding 250,000 more per month. According to Ford, the app provides necessary information about each user’s Ford vehicle, allows the vehicle to be controlled remotely, makes roadside assistance easily accessible, helps vehicle owners to make payments using the app, and of course has a vehicle locator feature.

Overall, we remain positive on WPP’s business. We expect organic revenue growth acceleration this fiscal year, given the easier comps during the first six months. We have assumed an average annual organic growth rate of 2% from this year through 2028. With less account turnover plus upgrades of back-end systems, we expect WPP’s operating margin (as a percentage of gross revenue) to inch back up to around 15% by 2027, slightly above the levels we saw before the impact of the “mediapalooza” (or “reviewmageddon”) and account losses beginning in late 2016.

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