As more and more consumers turn to online platforms to work, shop, and play, digital advertising is poised to play an increasingly bigger role in the U.S. economy, according to Fidelity’s Matt Drukker.
“The prevailing landscape for advertisers is becoming more digital every day, not only due to the fact that it’s where customers’ eyes are, but also because it can be effectively measured and optimized,” says Drukker, portfolio manager of Fidelity® Select Communication Services Portfolio (FBMPX).
Importantly, growth in both users and engagement, across many ad-supported platforms, continues to be very strong, he points out. This is the key indicator of platform health, and, for some, short-form video has opened new surfaces of engagement that have yet to be really monetized, says Drukker.
That said, he acknowledges that the current demand environment is challenging and that a downturn in the economy likely could weigh on levels of ad spending.
Drukker adds that in a belt-tightening environment, advertisers will focus on the highest return on investments, which largely favors the digital medium and should continue to drive market-share gains.
In managing the fund, he takes a stock-by-stock approach to capitalize on his view that growth, as well as revisions to earnings and free cash flow per share, drive communication services stocks. As such, the portfolio tends to emphasize companies with sustainable growth that are likely to top expectations, as well as secular growers that can deliver consistent excess returns.
For the past 15 years, spending on digital advertising has consistently outpaced U.S. gross domestic product by 15 percentage points. Moreover, Drukker notes that after compounding 18% the past decade, the digital ad market reached $360 billion in 2021.
Millions of firms around the world are now able to directly reach billions of consumers through a web portal, and he suggests that this has expanded both the number of companies that advertise, along with the digital ad intensity of internet-based commerce in general.
From Drukker’s standpoint, Netflix entering the advertising market with ad-supported tiers should prove to be a seminal event for increased spending growth in connected TV advertising, a rising form of marketing that leverages robust customer targeting capabilities, within the context of premium TV content.
He believes leaders in the communication services sector will optimize the role of customer acquisition as a service for businesses worldwide. Consequently, Meta Platforms (META), Netflix (NFLX), and Alphabet (GOOGL) comprised more than 40% of the portfolio as of December 31.
“At this scale, we have to think of the leading digital advertising firms within both a long-term growth and cyclical context,” Drukker contends.
Ultimately, as he sees it, investors must analyze the earnings potential of these companies coming out of a recession. Digital platforms that contain costs, he concludes, should have the best chance of generating very high incremental profits as demand rebounds, which, historically, it has.
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Matt Drukker is a portfolio manager and research analyst in the Equity division at Fidelity Investments.
In this role, Mr. Drukker manages the Fidelity Select Communication Services Portfolio, Fidelity Communication Services Central Fund, VIP Communications Services Portfolio, and Fidelity Select Wireless Portfolio. Additionally, he is responsible for covering the communication services sector including telecom, media, video games, and large-cap internet and media stocks.
Prior to assuming his current responsibilities, Mr. Drukker managed the Fidelity Select Telecommunications Portfolio and co-managed Select Wireless Portfolio. In addition, he covered the restaurant industry and was responsible for managing the communication services sub-portfolio of the Fidelity Stock Selector All Cap Fund. Previously, he was an intern in Fidelity's Equity Research division.
Before joining Fidelity full time in 2007, Mr. Drukker was an investment banker in New York, specializing in mergers and acquisitions and capital raising for financial institutions. He has been in the financial industry since 1999.
Mr. Drukker earned his bachelor of arts degree in economics from Williams College and his master of business administration degree in finance from The Wharton School of the University of Pennsylvania.