The Best Way to Invest in Online Advertising

The Best Way to Invest in Online Advertising

Online advertising is a huge and growing industry, and it will present plenty of opportunities for companies and their investors to profit for years to come. Different companies offer their own unique characteristics, so let's take a look at some major players worth considering.

Online advertising
According to eMarketer, the global digital advertising business is expected to generate $117.6 billion in revenue during 2013, a 13% increase versus 104.04 billion in 2012. People all over the world are spending an increasingly larger proportion of their time and attention online, and advertising money will continue moving in that direction over the next years.

Online advertising is not only stealing market share from traditional media, it's also creating new opportunities for advertisers that don't fit into the old advertising paradigm. Digital advertising is much cheaper and better focused than the old methods, so it's a worthwhile investment for many small businesses that don't have the money to invest in traditional advertising.

As technology improves, the industry will continue gaining effectiveness and increasing its value over time. Online advertising is here to stay and grow, and investors would be smart to pay attention to the sector and different alternatives to play this trend.

The Players
Google is the undisputed leader in the business, eMarketer estimates that the online search giant owns a 32.84% of the digital advertising industry, followed by Facebook with a 5.41%, Yahoo! comes in third place with a market share of 2.97% and Microsoft in fourth position with 2.49%.

Mobile is a crucial segment in this business; the mobile ad market worldwide is expected to grow 89% to $16.65 billion in 2013. Google is even more dominant in this area with 53.17% of the market, Facebook has 15.8%, and Pandora appears in the third place with a market share of 2.37%. Yahoo and Microsoft are not relevant players in mobile according to eMarketer.

The leader
Google is the strongest player in online advertising by a wide margin. The company has an invaluable strategic asset in its popular search engine, and over the last years it has built a gigantic network of products and services generating enormous amounts of traffic.

When it comes to mobile, no company compares with Google. Android owns a global market share of almost 80% in smartphones according to data from IDC, followed by Apple's iOS at a considerable distance with a market share of 13.2%.

Android has been gaining market share versus Apple in tablets too, research firm Canalys estimates that Android tablets already account for 53% of the market. And if that weren't enough, Google builds many of the most popular applications for iOS like YouTube, Search, Maps, and Gmail, among others. Even when it comes to Apple devices, Google is remarkably well-entrenched to benefit from advertising opportunities in the mobile revolution.

The challengers
Facebook is a riskier alternative, but at the same time it offers superior growth opportunities versus Google. The company founded by Mark Zuckerberg has made a lot of progress when it comes to monetizing its gigantic user base of more than 1.15 billion monthly active users.

Facebook delivered a blowout earnings report in the last quarter with revenue from advertising - 88% of total revenue - growing by 61% versus the same quarter in the previous year. Mobile advertising revenue grew 75% sequentially in the quarter, and it now represents 41% of the company's overall advertising, up from the previous quarter when it was at 30%.

Facebook's successful news feeds ads are a relatively new product; they were introduced late last year, so the company still needs to prove to investors what kind of growth it can consistently generate over time. But Facebook is moving in the right direction and finding innovative ways to monetize its network, so it´s certainly an alternative worth considering.

Yahoo! has made an impressive comeback under the leadership of Marissa Mayer. The company is improving its products and attracting valuable human talent. Yahoo! is definitively moving forward, but it still has not made enough progress in a key area like mobile.

Besides, Yahoo! is trading at a similar valuation to Google, with a forward P/E ratio of 18.2 Yahoo! versus 17.6 for Google. For the same price, Google has more to offer to investors as the undisputed industry leader with remarkable strength in mobile.

As for Microsoft, online advertising pales in comparison to other segments like Windows and Office, so the company can hardly be considered the best way to invest in online advertising .

Pandora is a pure play on online radio, and the business is performing strongly: the company reported 71.2 million active listeners in the last quarter, up a 31% versus the same quarter in the previous year. Monetization has been improving too as the company delivered a 97% increase in the much important area of mobile revenues for the quarter.

On the other hand, competition is increasing and Apple's new Tunes Radio is a considerable risk to watch. Online radio will likely have enough room for different players to successfully coexist, so it's not necessarily a sum zero game where the winner takes all.

But Apple the undisputed king in the music download business and it has more financial muscle than Pandora to pay for content. The Cupertino giant may put some serious competitive pressure on Pandora in the middle term.

Bottom line
Online advertising is a promising business area generating plenty of opportunities for investors over the coming years. Google is the unquestionable leader and the must-own name in the industry, while Facebook can be an interesting alternative for investors with higher risk tolerance looking for companies with superior growth prospects.

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Andres Cardenal owns shares of Apple and Google. The Motley Fool recommends Apple, Facebook, Google, Pandora Media, and Yahoo!. The Motley Fool owns shares of Apple, Facebook, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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