Ad Tech 3Q23: 17% Revenue Growth. Reviewing Current Trends, Future Opportunities
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The eight companies I group together as part of an ad tech composite – The Trade Desk, LiveRamp, DoubleVerify, IAS, Magnite, Pubmatic, Viant and Innovid, each of which primarily generate revenue from software, data or both – grew revenues by 17.3% during the third quarter of 2023, above the 13.6% growth rate I calculate for revenue for the eight largest sellers of digital advertising outside of China. The median ad tech company grew closer to the large digital seller composite, up by 13.8%.
For comparison, the weighted average growth rate for ad tech in the second quarter was 15.4% while the median ad tech company grew by 8.8%, and the largest sellers of digital advertising grew 7.2%.
Superficially we could certainly observe a stronger connection between growth in digital advertising on the part of large advertisers and the “typical” revenue growth rate for an ad tech company, although arguably the sample is too small to be conclusive here, not least as there are dozens of smaller private ad tech companies which would impact a median, and there is of course Google’s ad tech business which, if we knew the growth rate, would impact any weighted average.
Looking forward, management guidance for the composite conveys expectations of 13.8% growth, although considering that guidance issued last quarter for this group for the quarter just completed was for 13.2%, one might reasonably conclude that actual expectations are probably the same or slightly stronger – which would be consistent with the relatively easy comparable of 4Q23 (in the third quarter of 2022 this group of companies grew by 21.8% but in the fourth quarter of 2022 they grew by 14.7%).
Perhaps unsurprisingly, many companies called out “macro” concerns, including war, strikes, and other factors as sources of caution.
However, I argue that no company in this sector can really say with certainty that strikes in the auto or entertainment sector – or any other industry – is contributing to a slowdown, especially where there is a degree of fluidity of budget with Meta, Amazon and Tik Tok, each of which are most likely going to post more than 20% growth, and in a world where Meta and Amazon grow their revenues by more every year than the total revenue base for this group of eight companies. They may be able to point out that clients of theirs in these sectors exhibited unusual trends, but it’s almost impossible to know that the client – or groups of clients – didn’t simply shift budgets.
That’s not to say there aren’t risks, of course.
No-one knows what the consequences of the looming depreciation of third-party cookies will be, although it’s unlikely to impact the quarter ahead. Looking forward, I generally hold the view that marketers allocate budgets using the “least-bad” available data. Put differently, it’s not a matter of whether or not the data they use is good or bad, but whether it’s better than the alternative. Through this framework, budgets are un-impacted by cookie depreciation, but they will shift based on whose solutions are better – or least-bad. Who will benefit and who will suffer remains to be seen.
AI is also probably more of a risk than anything to ad tech, or at least many of the products that are provided by ad tech companies. More specifically, I think the AI-based ad products that Alphabet and Meta have launched appear to be so successful in absorbing advertiser budgets that spending through them and other walled gardens probably continues to grow. This is negative for the “open web” where most ad tech has historically thrived. By contrast, those ad tech companies whose products work more closely with walled gardens probably fare relatively better than others. The rise in awareness of MFAs (“made-for-advertising”) websites and the increasing ease with which sites on the open web will be AI-driven in the future will contribute further to advertisers steering their spending away from display-based ad inventory and other products centered around the open web.
I also see many flags of caution around CTV. Beyond the broader issue that total spending on professional ad-supported video – TV, as we might otherwise call it, including CTV, as it’s usually all on budget for a marketer – is poised to decline on an ongoing basis, some ad tech companies exhibit optimism that incumbent broadcasters will allow ad tech companies to participate more meaningfully in the economics of their business. To the extent that the bulk of CTV inventory is associated with traditional networks, this won’t happen. Most incumbent TV networks – at least those with the bulk of revenue for the sector – won’t realistically want to give up control for programming that they don’t consider commoditized. Others in ad tech argue that bringing money into TV from outside of TV will support incremental, and that this will help empower ad tech companies. I generally believe that the universe of marketers who don’t already buy television have so many alternative ways to reach consumers through non-TV channels, and “proving” effectiveness of television is much more challenging than “providing” effectiveness of campaigns centered around conventional digital inventory.
This is, in large part, why I think there is more reason for optimism around supporting the growth of video on walled gardens. Certainly wherever there are ad tech companies adding value to this type of inventory – the short-form video provided by Meta, Alphabet and TikTok in particular – we are seeing significant growth which seems likely to persist for the foreseeable future.
Retail media also seems like a solid source of ongoing growth. I calculate that the biggest sellers of commerce media (retail media but also including travel-based advertising sales) grew by 23% in the third quarter in the United States, an acceleration from 21% growth in the second quarter.
Overall, the ad tech industry remains relatively healthy. And why shouldn’t it be? Ad tech is (are?) the operations of the digital advertising industry, and the complexity of digital advertising is unlikely to ease up any time soon.
To the extent they continue to evolve their product offerings in support of these operations and in directions that are consistent with the places where their products add meaningful value to publishers and marketers alike, I believe that healthy long-term growth can generally persist for the sector at large. As this maturing has continued in recent years, profitability has been improving – the eight companies tracked here saw 33% adjusted EBTIDA margins during 3Q23 and should probably improve for the full year over 2022’s 31% margin levels.
However, it’s worth pointing out that any perceived need to sustain margins may potentially serve as another risk. To the extent that ongoing investment is undoubtedly required for growth, it will remain important for stakeholders (companies and investors alike) to be supportive of this longer-term need.