Opportunities in communication services

The rapid rise of e-commerce gives online platforms—and digital advertising revenues—a long runway for growth.

  • Matthew Drukker, sector portfolio manager
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Key takeaways

  • Digital advertising dropped sharply earlier in 2020, as countries looked to contain the coronavirus and companies looked to contain expenses.
  • With consumers sheltering in place, their shopping and engagement focus has shifted to online even more.
  • Companies' eagerness to increase their digital advertising spend has inflected positively, favoring platforms with leading reach, precision targeting, and high-return ad offerings.
 

COVID-19 swept the globe in early 2020, and spending on digital advertising dropped sharply as countries locked down in an attempt to contain the virus and companies looked for quick ways to cut expenses. This curtailment in economic activity resulted in some of the weakest second-quarter numbers on record for many publicly traded companies, with traditional retailers particularly hard hit. The dip didn't last long, though. As the world grappled with the pandemic's effects, businesses with a digital focus managed to pull forward a year's worth of growth in just a few months. With consumers sheltering in place, their purchasing activity and engagement focus shifted to online even more than before, spurring a solid rebound in advertising spend across segments such as search, video, social media, and banner advertising.

Stuck at home, consumers have gravitated toward home-delivered goods and virtual experiences, and away from physical services and in-person events. Consumers are forming new habits, many of which are likely to persist long past the pandemic, given the convenience of same-day grocery delivery, curbside pick-up, and one-day shipping. As competition adapts, companies are motivated to invest in online advertising to attract shoppers.

The continued recovery of digital advertising—in spite of the pandemic—reaffirms the structural acceleration of companies directing dollars toward online platforms, especially now with consumers facing a stay-at-home holiday season. Amid ample debate over what lasting changes COVID-19 will wreak upon the market, I think one trend is clear: Companies' appetite for digital advertising has inflected, and those platforms with superior reach, precision targeting capabilities, and high-return ad offerings are well-positioned to capitalize on the change and lead the charge in coming quarters and years.

As the audience goes, so go the sponsors, and the shift to e-commerce has generated a multiplier effect on digital advertising. In recent years, US and international advertising revenues have been growing faster than world GDP, powered by growth in digital spend of 15% to 20% annually over the past 5 years. The evidence shows that companies with a high mix of online sales also have a changing cost structure, where savings in operating expenses—such as brick-and-mortar store maintenance, rent, and staffing—can be rationally converted into efforts to grow online sales. Whereas, in the past, retailers invested to maintain convenience and increase foot traffic, now they are paying up to drive digital traffic to their virtual storefronts—and working with key online advertising platforms to connect with online shoppers.

Despite delivering greater than 35% annualized growth during the COVID crisis, online shopping, perhaps surprisingly, is still well under 20% of total US retail sales. Looking at just the grocery segment, online buying is running much lower, with about a 10% market share. In my view, the dynamics outlined here should give online platforms—and digital advertising revenue streams—a long runway for growth and offer a potential tailwind to leaders in the communication services industry for years to come.

Next steps to consider

Research the Fidelity® Select Communication Services Portfolio (FBMPX)

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