Talk of a so-called ad recession has consumed earnings conversations this season as major technology companies warn of dwindling ad revenue as consumer spending weakens and marketing budgets shrink. That, combined with continuous headwinds from Apple ‘s privacy changes, are wreaking havoc on the battered tech and social media industry, where advertising makes up a sizeable chunk of revenue. While the conditions may spell trouble for these players in the months ahead, there are some stocks better insulated from these headwinds. Investors looking to play the trend should consider focusing on search names and those differentiated from Apple’s privacy policies, analysts say. Some of the biggest names in the industry have started to feel the pinch from an advertising slowdown. Snap attributed its recent dismal results to slow advertising demand and also blamed Apple. Meta too blamed a disappointing third-quarter forecast on weakening advertising, while Roku shares cratered more than 23% on the back of dismal results it blamed on an ad slowdown. Shares of all three stocks are down more than 50% this year, with shares of Snap off nearly 88% from their 52-week high. Big tech isn’t the only area of the ad market getting hit. The softening environment is weighing on streaming names such as Paramount , Warner Bros. Discovery and Fox , and will likely continue in the near future, Wolfe Research’s Peter Supino said in a recent note to clients. “We will see market shares shift as the pie stops growing or shrinks over the next six months,” said Rohit Kulkarni of MKM Partners. Betting on search and Google Many analysts believe search names — specifically Alphabet — are among the best-positioned companies to ride out the volatility and say they should continue to scoop up market share from others. Kulkarni notes that search typically focuses on behaviors and the user actively looking for similar terms. This typically allows advertisers to more easily target, gather data and ultimately see a better payoff — and it’s easily measurable through clicks. The method also hasn’t been hit by Apple privacy issues, which have struck many social media darlings. “Search is very well positioned to weather the storm because it’s very broad-based,” said Andrew Boone, an analyst at JMP Securities. “It basically covers goods and services, and because of that breadth, one piece can offset another piece.” Alphabet said in a recent earnings call that Google search and other advertising revenues rose 14% to $40.7 billion, while searches for terms like “open now” and “near me” grew 8 times year-over-year globally. The stock is down about 19% this year. Google search is typically the first and last step for a consumer, making it an integral portion of the consumer experience, MNTN CEO Mark Douglas explained on “The Exchange” last month . Most of the budget cuts from companies going forward will likely come in brand advertising, which is furthest away from the consumer, he explained. “These business models that combine together both advertising and e-commerce are going to still have resiliency as we go through these macro dislocations in the back half of the year,” Wells Fargo’s Brian Fitzgerald told “Squawk on the Street ” earlier this month. Look outside the Apple ecosystem Apple’s iOS changes are another factor continuing to put a damper on ad dollars. Implemented last year, the change prevents ad-supported sites from accessing an iPhone or iPad’s unique identifier without the user opting in and makes it increasingly difficult for targeted ads. As a result, companies situated outside of the Apple funnel are better positioned to weather this advertising slowdown, said Barton Crockett, an analyst at Rosenblatt Securities. Crockett pointed to search heavyweight Alphabet, and e-commerce giant Amazon, which have benefited from advertising money moving away from the Apple ecosystem as advertisers look for ways to measure return on investment. To be sure, some companies are making progress in finding ways around Identifier for Advertisers (IDFA) challenges, but there’s no easy fix, Canaccord Genuity’s Maria Ripps said in a note recent note to clients, noting that these obstacles are hitting small- and medium-sized business advertising especially hard. “These dynamics are impacting SMBs more acutely than large enterprises as SMBs tend to be more performance-oriented and are highly focused on short-term advertising ROI,” she wrote. Looking outside big tech Many lesser-known names could also offer opportunities to ride out the ad recession, according to some analysts. Loop Capital’s Yun Kim called DoubleVerify Holdings a good name to weather the slowdown, saying in a note to clients that the company’s focus on ad volumes versus rates better positions it in this environment. “With the current slowdown in digital advertising industry driving lower pricing overall, we are expecting brands to increase their ad placements to take advantage of this market condition, even if their overall digital ad budget is under pressure,” Kim said. KeyBanc Capital Markets’ Justin Patterson favors companies with limited international exposure and those focused on connected TV, pointing to names like The Trade Desk . While not fully immune to macroconditions, the company’s access to “high growth channels” such as political ad spending is an advantage it has over some larger players, he wrote. Many local TV companies also seem to be benefiting in this early part of the ad recession, boosted by strong labor market trends and local business, Crockett said. For example, Comcast ‘s NBCUniversal saw a roughly 1% year-over-year decline in advertising revenue, although the parent company’s cable segment saw ad sales rise 10% in that period, in part due to increasing political ads, he mentioned in a note to clients. “This is the most curious ad recession in history,” Crockett said. “We’ll see how it evolves from here.” — CNBC’s Michael Bloom contributed reporting Disclosure: NBCUniversal is the parent company of CNBC .
© heardonwallstreet.com