Most analysts continue to mouth the consensus dream projection that online display ad spending will grow next year despite a collapsing global economy. The sooner the market realises that this is a hallucination, the better.
Hats off to RBC analyst Ross Sandler, therefore, who has broken from consensus and is now projecting that display ads will be, gasp, down 0%-10% next year. We expect the actual numbers will be in the down 10%-20% range, but Ross is a lot closer than most.
Ross also has an interesting “buy” list. We shudder at the thought of owning IACI, but we have to agree that 3X EBITDA is pretty cheap:
Unfortunately, we believe that 2009 will be a similarly difficult environment to 2008. We expect display advertising to be down y/y in 2009, anywhere from 0% to -10% for the broader industry (although some companies could outperform).
The search and lead generation industries should fair better, as advertisers allocate more budget to the highest ROI channels. In this environment, we think investors should stick with companies that have the following characteristics:
1) over-exposure to performance-based media and under-exposure to display, 2) strong balance sheets, 3) low fixed costs and the ability to react quickly to a worsening environment, and 4) company-specific catalysts that drive out-performance. Valuations currently reflect further downward estimate revisions, which we expect to see over the next few quarters.
Best Long Idea: IACI – A Great Place To Hide Out:
IACI has $9 in cash and another $2-$3 in other assets, so the enterprise value per share is around $4, or $800m. We like the IAC story based on: 1) Valuation: shares are the cheapest in the coverage universe at 3x 09 EBITDA, 2) Google Backstop: IAC gets $500m in high margin revenue from Google each year, and that should hold up in any macro environment as long as IAC delivers clicks, 3) Margin Improvement: $125m in 2008 corporate expense drops to $65m in 2009, and drives 400bps of margin expansion (assuming no segment level improvement), and 4) Under-owned/Undiscovered: IAC is a new story post-spins, that should generate more interest over time (but hasn’t yet).