FA Alpha Daily

Advertising is in trouble

The advertising industry is hitting some turbulence. Economic woes are forcing companies to tighten their belts, and even giants like Perion Network (PERI) are feeling the pinch. With Perion facing its first revenue decline in years and a significant drop in stock price, the challenge now is whether the company can adapt to this new reality or if its high-growth phase has concluded. In today’s FA Alpha Daily, we delve into the struggles facing the advertising sector and discuss why investors should exercise caution.

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The advertising industry has been facing headwinds as macroeconomic uncertainties continue to loom large.

With inflation remaining elevated and interest rates rising sharply, businesses are cutting costs to protect margins.

Marketing budgets, being more discretionary in nature, are often among the first to feel the pinch. This has created significant challenges for companies that rely heavily on advertising revenues.

One such company is Perion Network (PERI), a top player in digital advertising solutions.

Perion provides tools like search marketing and content optimization to major brands, agencies, and publishers worldwide.

Over the years, it has diversified beyond search into other channels like social and connected TV (“CTV”) through acquisitions. However, search still accounts for the majority of its revenues.

Perion has shown resilience so far, growing revenues every year from $270 million in 2017 to a record $740 million in 2023.

However, Perion’s growth streak seems to be coming to an end.

In its Q4 2023 earnings call, management slashed full-year 2024 revenue guidance by a massive 32% to $600 million from $880 million. This would mark Perion’s first annual decline since 2017.

The guidance cut spooked investors, sending the stock plummeting 40%.

Perion’s main clients are in highly cyclical sectors like automotive and retail which are cutting ad budgets the most in a downturn. Search engine giants like Google are also becoming more selective in new client additions and spending levels.

Perion’s top competitors are also facing similar headwinds. Most industry analysts have a bearish outlook, with downward revisions to revenue and earnings estimates across the board.

Unless macro conditions improve sharply, it seems Perion’s growth years are behind it for now.

The company will need to aggressively cut costs and shift focus to higher-margin services to protect profits.

Advertising remains a tough space for investors.

Pure-play ad tech companies like Perion will continue facing significant near-term pressures due to slowing economic growth and client spending cuts.

Investors should remain cautious about such businesses until macro headwinds subside.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research

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