As the communications services industry, home to a variety of internet titans, tumbles this year, it stands to reason that investors aren’t excited about the growth potential of the digital advertising space.
This is especially true considering that in a recession, advertising – digital and otherwise – is likely to be recalled. However, the long-term prospects for digital advertising are compelling, and expansion in this area could benefit exchange-traded funds, including the ARK Next Generation Internet ETF (NYSEArca:ARKW). Not surprisingly, e-commerce is expected to be one of the drivers of digital advertising growth.
“Our research suggests a base-case scenario in which U.S. digital ad spending grows at a compound annual rate of 9%, growing from approximately $180 billion in 2021 to $275 billion by 2026, as the shows the green bar below. Our bullish estimate calls for a compound annual growth rate of 19% to $410 billion in 2026,” rated ARK Investment Management associate portfolio manager Nicholas Grous.
While e-commerce and online retail stocks are out of fashion this year – just look at Amazon (NASDAQ:AMZN) – investors should be careful when seeing the group through the lens of a “pandemic game”. Although the coronavirus crisis has boosted online retail sales, the reality is that this segment was growing before COVID-19 and still has room to continue to do so, potentially triggering more ad sales along the way. .
“Although e-commerce penetration in the United States has increased from less than 5% of total retail sales in 2011 to nearly 14% in 2021, it remains below the global average of 19% and well below the 44 % of China,” Grous added.
Investors should also remember that the United States has more retail square footage — 23.5 square feet per capita — than any other country. By this metric, the United States is far ahead of other developed economies and large emerging markets like China. On the other hand, as consumers here continually embrace online shopping sites and more brick-and-mortar stores are abandoned, there is an important avenue for digital advertising.
“While physical retail activity has declined, the U.S. digital advertising market approached $180 billion in 2021, or 63% of the total advertising market,” Grous concluded. “We believe that cost considerations will significantly increase this percentage over the next five years. The annual cost of renting a brick-and-mortar retail business is over 20 times more expensive than “renting” a storefront on Shopify. If we were to include other initial costs and ongoing capital expenditures, the relative cost savings of online stores would increase accordingly. »
For example, Shopify accounts for almost 5% of ARKW’s weight and is the eighth largest component of the ETF.
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Opinions and predictions expressed herein are solely those of Tom Lydon and may not materialize. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.