As shown in the chart, the best performing Index over the last twelve months has been Digital Media stocks (+65% on a market weighted basis), followed by Ad Tech (+51%), Social Media (+37%), MarTech (+17%), and Esports & iGaming (-1%). Helping to drive returns has been a robust M&A marketplace, particularly in the gaming and digital media sectors.

Last quarter we noted that advertising technology (Ad Tech) stocks were the strongest performing sector over the previous 12-month period. The average stock in the Ad Tech sector at the end of the first quarter of 2021 was up 339% over the prior year.

On April 7, the Internet Advertising Bureau (IAB) released their 2020 internet advertising revenue report in conjunction with PricewaterhouseCoopers (PwC). The report concluded that digital advertising in the U.S. increased by 12.2% to $139.8B in 2020 from $124.6B in 2019.

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A year ago we wrote that over the previous decade online advertising as a share of all advertising had more than tripled to 50%, up from just 15% of advertising at the start of the decade. Our expectation was that this trend would continue. What we could not foresee then was that a global pandemic that would redefine how we went about our everyday life.

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Video Games has been one of the few sectors of the economy to benefit from Covid-19. Covid-19 lockdowns have boosted user engagement with video games and esports as consumers shelter in place. The pandemic is accelerating existing trends in the gaming industry.

Three months ago, our heading for this newsletter was called “Global Pandemic Spares Few Internet and Digital Media Stocks.” We then noted that the S&P 500 fell by 20% in the first quarter of 2020, while the four internet and digital media indices we monitor each fell as well, including ad tech (-28%), social media (-19%), digital media (-10%) and marketing tech (-7%) stocks.

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During the first quarter of 2020, the S&P 500 fell by 20%. Only the Noble ad tech sector underperformed (-28%) the S&P 500’s performance during the first quarter, with social media stocks (- 19%) declining in-line with the S&P 500, and digital media (-10%) and marketing tech (-7%) stocks outperforming the broader market.

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As we start 2020 and a new decade, we take look back the past decade and look forward toward what the future may hold for media companies. According to several advertising prognosticators, online advertising accounted for slightly more than 50% of total US advertising spend in 2019, more than triple from 15% just 10 years earlier.

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Concerns over the strength of the general economy and fears of an economic downturn weighed heavily on media stocks. Most media stocks have underperformed the general market over the past 12 months and year-to-date, as detailed in this report. (Deal stocks are largely the only stocks that have outperformed.) The underperformance is somewhat typical in a late stage economic cycle for consumer cyclicals like media stocks. But, are investors too early on betting on an economic downturn?

Most media stocks under-performed the general market in the second quarter, although there were some significant variances in individual stocks (which are discussed later in this report).

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Investors were focused on the Federal Communications Commissioners’ (FCC) comments at the National Association of Broadcaster’s (NAB) convention in Las Vegas last week.

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While we were anticipating a difficult market for media stocks in the fourth quarter and warned investors to be cautious (report entitled Climbing the Wall of Worry" dated 10/9/18), none could have predicted the devastating stock price performance.

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There seems to be positive news on a number of fronts in the media universe, but the stocks seem to discount much of it.

Index Performances: NYSE Arca Biotechnology (BTK, +23.5%) and NASDAQ Biotechnology (NBI, +11.2%) indices outperformed benchmark indices S&P 500 (SP50, +8.1%) and Russell 3000 (RUA, 8.5%) YTD 2018. In the last 2 weeks, NBI and BTK indices soared, climbing +57% and +30% respectively (NBI +7% and BTK +18%, as of August 29).

Stock Performances: NYSE Arca Biotechnology (BTK, +18%) and NASDAQ Biotechnology (NBI, +7%) indices outperformed benchmark indices S&P 500 (SP50, +6%) and Russell 3000 (RUA, 5%) YTD 2018.

Not surprisingly, Television stocks came back to life after a first quarter lull. The improved performance was on the heels of a pick-up in M&A, which is discussed later in this report.

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There has been a recent uproar over individual privacy related to the collection and misuse of personal data by Facebook (FB: Not Rated) and Google (GOOG: Not Rated).

Media stocks faced some headwinds in 4Q 2017 from weak auto sales, which declined in December to a run rate of 1.7% below that of 4Q 2016. This suggests that one of the key drivers to the advertising rebound may be losing some gas.

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On September 25th, the media landscaped rumbled with news that Raycom Media, a privately held television broadcaster which owns 65 television stations, merged with Community Newspaper Holdings, owner of a string of 110 newspapers and websites. Newspapers!

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It seems that investors in media stocks are already affected by the “dog days of summer.” Media stocks have drifted after a strong first quarter performance. (See details in the report). We believe that the performance relates to concern over the general macro-economic environment, including slowing auto sales.

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The question that soon will be answered is whether or not the media stocks, which had a stellar run following the Presidential election, will keep the substantial valuation lift or build upon it following first quarter results.

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A wave of optimism swept the investment community following the Presidential elections, with media stocks significantly outperforming the major indices which hit record highs. Media stocks in general were up a strong 12,6% versus a 4,6% gain as measured by the S&P 500 following the elections on November 8th to near current levels.

The political elections have been a focus for investors over the past quarter, with the unconventional Presidential election in the spotlight. The open seat Presidential race and the battle over the control over the Senate and the House was a perfect set up for a very strong political advertising cycle It appears now that this will not happen.

We believe that the media stocks are in an oversold position, following a 1.5% selloff in the group over the past quarter. In our view, the fundamentals of the media companies appear favorable, although the second quarter is not expected to be as strong as the first quarter.

From April 16-21, media investors turned their attention to the National Association of Broadcasters’ (NAB) conference, in general, and the Media Finance & Investor conference presented by NOBLE, in particular.

There has always been a variance between Wall Street expectations and the somber reality and the dogged slow pace of drug development; in times of irrational exuberance, investment decisions may be made on meagre data; investors are now in a conservative mode, and rightly so; in these times, the words of William Edward Deming rings true, “in God we trust, all others bring data.”

A rebound in media stock valuations in the fourth quarter 2015 was not enough to offset the declines earlier in the year, with the exception of the television group.

In our last newsletter, we alerted investors that the media industry faced a tough second quarter, with weak national advertising.

We believe that the lackluster general economy and weak national television environment likely will position many media companies for a disappointing second quarter.

Media stocks seemed to be churning as investors determine the direction of the near-term fundamentals.