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Smart Investors Are Watching This Trend Right Now

It can be an important exercise to observe the trends affecting the stocks you own or are considering buying. Your focus should be on those trends that have the power to move vital metrics such as revenue, costs, and profits.

One trend that smart investors are paying attention to right now is the rapidly rising price of digital advertising. Plenty of companies use it to acquire customers, boost sales, and raise brand awareness, but rising prices threaten the cost effectiveness of those campaigns.

Image source: Getty Images.

Rising ad prices

To find evidence of the rising costs of digital advertising, you need not look further than the quarterly financial statements of the two giants in the arena: Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) and Facebook (NASDAQ: FB). Between them, they currently control more than 50% of the digital advertising market in the U.S. Therefore, looking at how their prices are changing offers a lot of insight into the overall market.

Alphabet's cost per click -- what advertisers pay to the tech giant when a potential customer clicks on their ad -- rose 31% year over year in its most recently reported quarter. Similarly, its cost per impression -- how much businesses pay each time their ad is shown to a customer -- increased by 63%.

Although Facebook does not break its reported figures out by the type of advertising, it did report similar price increases: Its average price per ad increased by 47% year over year in the second quarter.

What's more, both companies' price increases are accelerating.

Stocks that could benefit

  • Pinterest (NYSE: PINS) generates all its revenue from advertising. If prices for digital ads are rising, the image-based social media company will surely benefit.
  • fuboTV (NYSE: FUBO) offers a streaming alternative to cable TV: a bundled package of streamed TV channels that prominently features live sports. Over the past several quarters, the share of its revenue that comes from advertising has been increasing. The ad segment is already more profitable than the company's subscription business, so rising ad prices should do wonders for fuboTV.
  • Disney (NYSE: DIS) needs no introduction. The media giant's robust array of streaming services, cable channels, and broadcast channels should benefit from rising advertising prices.

Stocks that could suffer

  • Skillz (NYSE: SKLZ) operates a mobile-gaming platform that allows players the option to wager on the video games they play against each other. It's advertising aggressively to acquire players. Indeed, it spent 111% of revenue in its most recent quarter on sales and marketing costs.
  • Coca-Cola (NYSE: KO) trimmed its marketing spending last year at the onset of the pandemic as did many other businesses. Now, with economies reopening and people resuming more of their pre-pandemic activities, the beverage powerhouse is ramping up ad spending again to raise brand awareness.
  • Worldwide travel facilitator Airbnb (NASDAQ: ABNB) was devastated by the pandemic as travel came to a near halt. But now that billions of doses of COVID-19 vaccines have been administered, more folks are looking to travel again, and the company expects a rebound of epic proportions. Airbnb is advertising to acquire hosts to increase the supply of listings to match that anticipated surge in demand.

Investor takeaway

The current rise in digital ad rates can partly be attributed to a jump in demand as businesses make an effort to get the word out that they are open again, and to recover public awareness with consumers. There is no telling if this trend will persist or reverse in the longer term, but investors should pay attention to the metric with regard to how it can impact the stocks they are following.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Parkev Tatevosian owns shares of Alphabet (C shares), Coca-Cola, Pinterest, and Walt Disney. The Motley Fool owns shares of and recommends Airbnb, Inc., Alphabet (A shares), Alphabet (C shares), Facebook, Pinterest, Skillz Inc., and Walt Disney. The Motley Fool recommends fuboTV, Inc. The Motley Fool has a disclosure policy.


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