There’s an old German proverb: “trees don’t grow to the sky.” It echoes the idea that companies will invariably face limits to growth as they mature.
Today, many have increasingly come to view tech giants like Facebook, Alphabet, Apple, Google, and Microsoft (which compose ~20% of the S&P 500’s market cap) as companies approaching the timberline. But these misgivings often rest on a faulty assumption: that the playing field itself isn't growing.
What if it were?
One example: the advertising industry. Facebook and Google already control ~60% of worldwide digital ad spend — essentially a duopoly.
Through the lens of their market share, it's easy to think they might soon hit a ceiling. From a different angle, however, the digital ad market itself is poised for takeoff.
The current pandemic is hastening the offline to digital advertising migration. In our opinion, this is happening for two reasons:
1. Offline advertising is becoming more dispensable. Print ads are less measurable (how many eyeballs saw that billboard?), less variable (contracts with ad agencies), and less actionable (you can’t double-click a magazine ad to buy a featured item). That’s a trifecta of economic trouble. No wonder print ad spend is expected to fall ~32% this year according to Interpublic.
2. Online advertising is becoming more resilient. As the world consistently shifts to digital, businesses looking to advertise their products are following the eyeballs. Their ads need to be placed where people will see them. Guess where most discovery happens? “Facebook and Google ads are the new rent,” we’ve heard many companies say.
Cautionary adages may be catchy, but in investing, try to zoom out. Trees may not sprout upwards forever, but forests can often keep growing.
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