16 Sep 2021

What’s Driving Digital Ad Strength?

Global Insights
Contributor(s): Citi Global Insights
Digital advertising is booming. A research note by Citi’s US Internet and Media Research analyst, Jason Bazinet, summarized here, asks what exactly is driving this recent surge and whether it can last.

The Digital Ad Market Is Humming

From the first quarter of 2018 to the fourth quarter of 2019, digital ads grew about $10 billion year on year per quarter. In the fourth quarter of 2020, they reached two times that level, or about $19 billion of incremental revenue. By the first quarter this year, digital ad growth was about $23 billion. And in the second quarter this year, digital ad growth reached around $37 billion year-on-year growth. That’s about four times the typical level.

The Big Question Is What’s Behind This?   

Many clients reckon that powerful forces are at work, including a secular shift to eCommerce, pricing power shifts with respect to particular firms, and more rapid growth from ad-intensive industries, such as mobile games.

But Jason and team do not think that those factors fully explain the growth. In fact, they question if some of them are a driver at all.

Quarterly Incremental Y/Y Digital Ad Revenue vs. Pre-COVID Average ($ billions)

Source: Citi Research, Company Reports











Of course, eCommerce is growing.  And, this does provide a tailwind to digital ads.  But, the eCommerce tailwind is not strong enough to explain all (or even most) of the recent strength in digital ads, the Research analysts say.

Indeed, if all of the strength in digital ads was driven by eCommerce, online retailers would have spent ~$0.40 on ads to generate $1 of revenue in the second quarter this year. That is far higher than the more typical (and reasonable) high-single-digit rate prior to the second quarter.

Some investors point to pricing as the primary driver behind recent ad strength.  However, pricing is likely an output—a function of ad supply—rather than an input.

Other investors have pointed to the economy becoming more ad intensive, as a driver behind the recent strength. If this were the case, sales and marketing expenses could be expected to increase on a percentage-of-revenue basis relative to pre-COVID levels.

Citi Research analysts looked at expenses that capture ad spend (SG&A or S&M, depending on the company) as a percentage of revenue for 45 stocks within their coverage. They compared the first half of 2021 to the first half of 2019.

Select Coverage Universe Marketing Expense Line Item as % of Revenue (percent)

Source: Citi Research, Company Reports


In May this year, the analysts regressed digital ads against three key drivers: 1) US personal consumption Expenditure (PCE), 2) US eCommerce sales, and 3) global web traffic of major eCommerce sites.

The idea behind the regression was simple: if consumers are browsing online (web traffic), are shopping online (eCommerce sales), and have money to spend (US PCE), then marketers will naturally advertise more on digital platforms.

And, the regression worked. This regression resulted in a high R2 of 0.97.

US PCE grew 21% in the second quarter this year.  That’s far more robust than recent history, as the next chart shows.

Quarterly US PCE Growth Y/Y (percent; $ billions)

Source: Citi Research, US Federal Reserve


eCommerce trends have also been strong, growing 32% in the fourth quarter of 2020, 39% in the first quarter of 2021, and 9% in the second quarter this year on tough comps.

Using the same regression coefficients (from earlier this year), and PCE, eCommerce sales and web traffic trends for retailers, the analysts say that they can explain 93%-97% of the strength in digital ads. In effect, the regression still seems to work for the second quarter 2021 strength.

Using the regression outputs to decompose the drivers of digital ad strength, it is clear that the baton was passed from eCommerce and web visits (in 2020) to PCE in 1H21. Indeed, in the most recent quarter, almost all the digital ad strength was driven by the robust PCE growth rate.

If Citi's Research analysts are right, the recent strength, therefore, is not a sign of some new secular paradigm. Rather, it has been primarily driven by remarkably robust PCE and, to a lesser extent, healthy eCommerce sales. The full report (published on September 8, 2021) goes into greater depth on the regression analysis and is a must-read for anyone interested in digital advertising trends. Find it here: North America Internet - Robust Macro Trends Key Driver of Recent Digital Ad Strength.

Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.


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