Movers and SHAKERS
Double and Triple-Digit Returns Despite the Pandemic
Digital Media & Technology stocks have been on a tear after a soft pullback early in the second quarter. As Q2 progressed, the S&P 500 increased by 20%, while Digital Media & Technology stocks soared, with digital media stocks up 24%, social media stocks up 37%, marketing tech stocks up 48%, and ad tech up a whopping 94%. These all significantly outperformed the market. In fact, not a single stock in the four sectors was down in the second quarter. Not only did no stock in this universe decline, but many saw double and triple-digit returns. Including the Leaf Group (LEAF, +173%), Inuvo (INUV, +126%), Spotify (SPOT, +113%), The Trade Desk (TTD, +111%), and Cardlytics (CDLX, +100%). Snapchat (SNAP, +97%) nearly doubled as well.
Through the first half of the year, the S&P 500 finished down 4%, while the larger cap, but more narrowly focused, Dow 30 Industrial Index decreased by 10%. During the same time, the FAANG stocks all finished up in the first half of the year: the stocks of Facebook, Apple, Amazon, Netflix, and Google finished +11%, +24%, +49%, +41%, and +6%, respectively.
Are the Digital Media & Technology stocks headed for a bubble, or can the momentum keep going? Noble Capital Market’s Media Analyst, Michael Kupinski, indicated that the strong performance thus far has been fueled by fundamentals. Marketing tech stocks, with their recurring revenue business models, fared best in the first quarter and first half of the year. Of the 11 companies in the marketing tech sector he follows, 9 of the stocks finished up in the first half of the year, led by Hubspot (HUBS, +42%), Adobe (ADBE, +32%) and SVMK Inc. (a.k.a. Survey Monkey (SVMK, +32%). He expects this group to post the strongest year-over-year revenue results compared to the advertising-based businesses that make up the ad tech, social media, and digital media sectors.
On the other end of the spectrum, 7 of 11 ad tech stocks finished down in the first half of the year. Investors are likely wary of the growth prospects for companies whose businesses are based on ad spend. Digital advertising declines in the 30%-40% range were common in the month of April, slightly better than traditional media advertising declines. However, it would appear that digital advertising trends improved significantly in May and June, far better than the advertising improvements at traditional media companies.
Can the strong performance in these sectors continue? Kupinski indicated that as revenue visibility improves, so too should M&A. If visibility doesn’t improve and fundamentals remain tepid, it may accelerate consolidation trends, as companies realize they need to get bigger to compete with the walled gardens of Google, Facebook, and Amazon. According to Mergermarket's, Global & Regional M&A Report, the number of M&A deals fell by 39% sequentially to 2,630 deals in 2Q20 from 4,308 deals in 1Q20, and deal values fell by 48% to $308.9B in 2Q20 from $592.6B in 1Q20. This is not too surprising given the onslaught of the Covid-19 pandemic, which caused most companies to focus on preserving cash rather than spending it. M&A is a tricky proposition in any economic environment, but especially so in one where there is very little visibility.
Where There was Consolidation
While deal volume fell considerably, it is interesting to note that M&A deal value actually increased in 2Q 2020 despite significantly fewer deals where purchase price information was available. Noble tracked 36 deals in 1Q 2020 with purchase prices available compared to only 15 deals where purchase prices were available in 2Q 2020. However, there were significantly larger deals in 2Q 2020 than in 1Q 2020: total deal value in 2Q 2020 was $12.9B vs. $6.4B in 1Q 2020. More than half of the deal value in 2Q 2020 was attributable to the $7.5B acquisition of GrubHub by Just Eat Takeaway. Other large deals included Zynga’s $1.9B acquisition of Peak Games and The Stagwell Group’s $1.6B acquisition of ad agency MDC Partners. Noble did not track any deals greater than $1B in 1Q 2020.
In their second-quarter commentary on broader U.S. M&A activity, MergerMarket noted that M&A in the technology sector started to rebound in May and June. With fundamentals showing signs of improvement in the Digital Tech sector, Kupinski expects mergers and acquisitions to increase in the second half of 2020, which should continue to keep investors interested in the sector and lead to good stock performance for the balance of the year.
Enjoy the Benefits of Premium Channelchek Content at No Cost
Photo Credit: blogtrepreneur.com