One of Google's (NASDAQ:GOOG) biggest advertising advantages is its ability to target ads.
Despite the growth of online advertising, however, television ads are still king. And now television ads can be targeted, too, which will only make life harder for the online search giant.
The right ad
Advertising on television and cable has historically been a shotgun approach. Stations could tell in a general way who was watching their station and shows, but couldn't pinpoint individuals. So a company might choose to advertise on a show because it was popular with women aged 19 to 35. However, everyone watching the show got the same ad regardless of whether or not they fit the desired demographic.
Internet advertising uses web behavior patterns to target ads at the individual level. That's a huge benefit because it means advertising dollars are getting spent on people who might actually become customers.
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Technology is clearly the driving force that's allowed companies like Google to fine tune advertising. In fact, being a leader in such targeting services is why Google dominates the online advertising market. Although the technology to do this is commonplace today, Google has pretty much locked up the web market.
With customers increasingly using mobile devices and targeting a mainstream technology, Google is likely to face a more difficult time recreating and maintaining the dominant position it has in online ads. That's already meant tighter margins than online ads. In fact, Google's profit margin has shrunk some ten percentage points over the last two years. Tighter margins in the mobile space is an important enough issue to make it into the list of risks in the company's annual report.
An old medium fights back
As if entering a new market with tighter margins wasn't bad enough, television stations are increasingly using targeted ads. For example, Reuters recently reported that DirecTV, Dish Network, Comcast, and Cablevision are offering advertisers targeted ad services. For example, "...a 35-year-old female DirecTV subscriber with a cat might get a spot promoting cat food, while the satellite provider would beam a car advertisement to her next door neighbor, a bachelor watching the same channel."
How effective is this individually targeted advertising? Starz tested targeted ads for five days to “pinpoint movie fans between the ages of 35 and 54 who also were subscribers of rival HBO.” Reuters notes that “Sales jumped 49 percent among the targeted viewers compared with another group who were less likely to watch movies that Starz approached with a more general offer.” That's impressive.
While there's little doubt that online advertising will continue to grow, traditional television ads are clearly becoming more competitive. That will minimize the benefit of using a Google targeted online ad and probably put pressure on the company's margins in online advertising. Although Google's top line continues to grow at an impressive clip, investors need to watch margins carefully. If the bottom line starts to feel a pinch, investors are likely to move on to greener pastures.
Ways to play
DirecTV has an enviable position in the U.S. market, which it is managing for profits rather than growth. Adding the ability to target ads should help improve margins in the domestic market. For growth the company is looking to Latin America. Although there have been issues in Brazil, the company is still a dominant provider in the region.
The company's revenues have grown every year for a decade, going from around $10 billion to nearly $30 billion last year. That's more than twice the size of competitor Dish Network's top line. Earnings have been more variable, but have gone from a little under a dollar a share at the end of the 2007 to 2009 recession to over $4.50 in 2012. DirecTV clearly has material earnings potential. And, with a trailing price to earnings ratio in the low teens, value and growth investors should find it of interest.
Cablevision is a turnaround candidate that is improving its business with the availability of targeted ads. The company's 2012 sales tally of $6.7 billion was essentially flat year over year, but down from about $7.8 billion in 2009. Earnings have declined for three straight years and it lost about a nickel a share in the first quarter.
However, the company operates in the wealthy New York, Connecticut, and New Jersey markets. Although growth is likely to be slow, its customers tend to be wealthy and willing to spend. That makes the company's customers desirable to advertisers, particularly if they can target their ads. Although a heavy debt load is an issue, the company has a solid business and potential upside if management focuses more closely on its cable assets.
Technology changes things very quickly. Google's advertising muscle, for example, looks like it could be starting to atrophy. That's a problem that investors should monitor closely.
DirecTV and Cablevision, meanwhile, look set to benefit from targeting technology shifting from the Internet to television. Investors should keep an eye on both, though DirecTV seems to be the best combination of value and growth at the moment.