Budget cuts, Trump and digital disruption hit ad stocks
Budget cuts, political uncertainty and digital disruption are conspiring to threaten major advertising stocks, according to an article by Joseph Lu of Zacks Investment Research. For instance, WPP's stock took a significant hit when Unilever, one of the firm's major clients, announced plans to save $2.1bn in advertising before the end of the decade. Agencies will also be affected by Facebook and Google's algorithmic budget allocation, which is more cost-effective than traditional practices. Lastly, the policies of President Trump are leading to "caution" among client companies, according to IPG CEO Michael Roth.
With the amount of ads that consumers come across everyday, it is hard to believe that the ad industry is facing any obstacles. However, advertising giants like WPP WPPGY , Omnicom Group Inc. OMC , and The Interpublic Group of Companies IPG may be facing some unseen risks.

Here are the three biggest problems confronting advertising companies:

Budget Cuts

Not from the agency itself, but the clients of ad agencies are cutting their budgets on advertising to remain profitable.

WPP's stock tanked last Thursday when one of its top five clients, Unilever UL , said it plans to save €2 billion ($2.1 billion) in advertising before 2020, instead of the previous goal of €1 billion ($1.06 billion). The increase in savings is a defense strategy from Unilever against Kraft Heinz's KHC merger offer, and it results in the company having less money to pay to WPP.

As the packaged-food industry sees a decline in sales with customers' shift in preference to fresh produce, consumer goods companies look to calm shareholders by showing that they can boost returns without outside help.

Consumer goods accounted for 31% of WPP's sales last year, according to Macquarie Group MIC . The British-based firm downgraded its growth forecast for 2017 from 3% to 2% last month. The decision might be prescient of Unilever's new strategy.

President Trump

"Advertising is cautious with Trump," said Michael Roth, IPG's Chief Executive, in a report by CNBC .

While certain issues that Trump supports may align with some brands' mission, agencies still have to go through content to make sure that it doesn't offend anyone.

Furthermore, global firms are sensitive to changes in the world economy, so as the President of United States, the leader of one of the world's largest economies, meets other world leaders and passes new policies ad agencies are affected with each event.

Digital Disruption

While the immediate threats from clients' cost-saving and the global economy is impacting ad agencies, the threat of digital disruption is also hovering over them. With Alphabet's Google GOOGL and Facebook FB as the dominant platforms for advertising, the automated algorithm that's designed to allocate budgets for its clients efficiently seems more cost-efficient than traditional agencies.

Though Google and Facebook also face obstacles like the recent ads placement controversy , advertisers, who previously pulled their ads out, have gone back to advertising on those platforms. The change of heart shows that companies have faith that these tech industry leaders will solve the problem.

Bottom Line

"All we're [the clients] really asking for is here's what we're paying for, validate that we're getting it, so we can then evaluate whether it's a good deal," said Marc S. Pritchard, Procter & Gamble's chief brand officer, in an interview with The New York Times. "And if it's two seconds, and it costs X, and lifts the business, we'll do that."

Budget cuts could mean pulling an ad from Google or Facebook, not necessarily away from the ad agency. President Trump's actions have noticeable effects throughout the whole market. While it is unlikely that the traditional ad industry will be wiped out entirely by the tech companies, certain Silicon Valley darlings are infamous for disrupting businesses, especially within the media sector.

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Facebook, Inc. (FB): Free Stock Analysis Report

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Omnicom Group Inc. (OMC): Free Stock Analysis Report

WPP PLC (WPPGY): Free Stock Analysis Report

Interpublic Group of Companies, Inc. (The) (IPG): Free Stock Analysis Report

Macquarie Infrastructure Company (MIC): Free Stock Analysis Report

Unilever PLC (UL): Free Stock Analysis Report

The Kraft Heinz Company (KHC): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.