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Goldman Sachs analyst Eric Sheridan has weighed in positively on the U.S. digital ad sector despite the extremely challenging macro environment.
The analyst took note of continued volatility in the overall digital advertising environment but adds that the recent cuts to 2H ’22 and ’23-’26 digital advertising forecasts are likely enough.
“We continue to see easier YoY growth comps in 2H ’22, albeit with a series of cross-currents (a volatile and likely worsening macroeconomic backdrop but with the industry lapping the Apple privacy headwinds and seeing the benefit of a big event landscape incl. the FIFA World Cup & US political election),” Sheridan told clients in a note.
As far as individual companies are concerned, Sheridan is most bullish on Meta Platforms (NASDAQ:META), given the “widest disconnect in terms of risk/reward skew” in shares.
“Press reports on internal communications indicate that the mgmt team has acknowledged a volatile operating environment ahead and are apparently adjusting the cadence of opex/capex (in a manner that could protect earnings power over the next 6-12 months). We continue to see solid growth for Instagram, a rising optimism in terms of engagement and potential monetization for Reels in 2023 and beyond and a compelling valuation (~7x EV/’23 GAAP EBITDA) when measured against growth expectations,” the analyst added.
Moreover, Sheridan also reflected positively on Alphabet (NASDAQ:GOOGL) as YouTube weakness is “better understood” than earlier while Search trends point towards continued strength.
“Looking beyond the short term dynamics of Search correlation to operating income and investment cycles, we still see GOOGL (now trading at ~12x EV/’23 GAAP EBITDA) as discounting the medium/long term potential for solid compounded growth, operating losses in Cloud and Other Bets yielding more positive EPS dynamics and continued high levels of shareholder returns by company mgmt,” Sheridan concluded.
