Investor Essentials Daily

Advertising is in trouble

April 19, 2024

The advertising industry is facing significant challenges due to macroeconomic uncertainties, such as high inflation and rising interest rates, leading businesses to cut marketing budgets.

Perion Network (PERI), a major digital advertising company, is feeling the pain. It’s expected to have its first annual revenue decline since 2017, with a sharp cut in its 2024 revenue forecast.

This outlook has caused its stock to drop significantly.

Perion, which primarily serves cyclical sectors like automotive and retail, and competes with major companies like Google, needs to adapt by reducing costs and focusing on higher-margin services amidst this downturn.

Industry analysts are generally pessimistic, suggesting a cautious approach for investors in ad tech companies like Perion.

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The advertising industry has been facing headwinds as macroeconomic uncertainties continue to loom large.

With inflation remaining elevated and interest rates rising sharply, businesses are cutting costs to protect margins.

Marketing budgets, being more discretionary in nature, are often among the first to feel the pinch. This has created significant challenges for companies that rely heavily on advertising revenues.

One such company is Perion Network (PERI), a top player in digital advertising solutions.

Perion provides tools like search marketing and content optimization to major brands, agencies, and publishers worldwide.

Over the years, it has diversified beyond search into other channels like social and connected TV (“CTV”) through acquisitions. However, search still accounts for the majority of its revenues.

Perion has shown resilience so far, growing revenues every year from $270 million in 2017 to a record $740 million in 2023.

However, Perion’s growth streak seems to be coming to an end.

In its Q4 2023 earnings call, management slashed full-year 2024 revenue guidance by a massive 32% to $600 million from $880 million. This would mark Perion’s first annual decline since 2017.

The guidance cut spooked investors, sending the stock plummeting 40%.

Perion’s main clients are in highly cyclical sectors like automotive and retail which are cutting ad budgets the most in a downturn. Search engine giants like Google are also becoming more selective in new client additions and spending levels.

Perion’s top competitors are also facing similar headwinds. Most industry analysts have a bearish outlook, with downward revisions to revenue and earnings estimates across the board.

Unless macro conditions improve sharply, it seems Perion’s growth years are behind it for now.

The company will need to aggressively cut costs and shift focus to higher-margin services to protect profits.

Advertising remains a tough space for investors.

Pure-play ad tech companies like Perion will continue facing significant near-term pressures due to slowing economic growth and client spending cuts.

Investors should remain cautious about such businesses until macro headwinds subside.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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