A Primer & Outlook for the AdTech Industry, and Applovin the 10-bagger
A tour of the space
Before the rise of the internet, the advertising space was fairly straightforward. Enterprises would work with a number of advertising agencies which would execute campaigns on a variety of media, ranging from television to newspapers, magazines, radio and billboards. Using an advertising agency as an intermediary made sense — they have the creative talent to draft campaigns that can resonate with the target audience, the know-how to allocate ads across the variety of suitable media channels, and with their large buying power they are able to pre-acquire large amounts of ad inventories at better rates with premium publishers such as the Wall Street Journal or the Financial Times.
The above world to connect corporations (the advertisers) with various media (the publishers) was fairly simple with only one type of player in the middle, i.e. the agencies. The only other option available was to go direct, where for example a small company would contact a local newspaper to place its ad. Or perhaps a large corporation such as Louis Vuitton would know exactly which publisher they wanted to use, and so they could contact for example Vogue to pre-buy a certain amount of ad inventories for the coming year.
In the internet era, this landscape in the middle to connect advertisers and publishers started to fragment considerably, with a wide variety of players emerging. The largest and simplest new type of player are the ad networks, where dominant internet platforms such as Google, Meta and TikTok make their own inventory available for advertisers. Cost-per-Mille (CPM) and Cost-per-Click (CPC) are two of the most commonly used pricing models, where the ad network charges the advertiser a price per one-thousand impressions in the case of CPM or per user-click in the case of CPC. The number of exact clicks generated will depend on the quality of the ad, so the ad network will provide the advertiser with an estimate beforehand. Another factor to boost user-clicks is better audience segmentation, so if you know exactly which audience to target then the click-through-rates (CTRs) will be higher.
CPMs are also dependent on the media format. Ads on Google are priced higher as the platform already know the search intent of the consumer for example to buy a sofa. Similarly, ads on Youtube have best-in-class CPMs as well — Google has tons of data on what a viewer is interested in while there is also no opportunity to quickly scroll past the ad like you can do on X or Instagram, without giving it much if any attention. CPMs also depend on the quality of each publisher, so for example Instagram will have much higher CPMs than a secondary competitor.
The rise of digital ads has been one of the most interesting growth stories for investors over the last few decades, and there is still further room for growth as traditional media such as linear TV will gradually disappear over time.
However, given the large share of digital media already, it’s also clear that growth will continue to slow down. This can easily be seen in the annual growth rates of both Google Search and Meta, which have gradually been trending down over time — with the exception of the online boom during the covid lockdowns..
For premium subscribers, we’ll dive deep into the other parts of the value chain for programmatic ads, and we’ll flag companies which are strongly positioned in their niches. We’ll also give the insights on the industry from a former manager at The Trade Desk, an expert available on the Tegus network, and we’ll discuss which stocks currently offer the best risk-reward for investors. Finally, we’ll update our thoughts on Applovin, which was our first investment idea we wrote about at the start of this year and is since up 10-fold.