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IPOs abound in digital advertising

Investors should keep an eye on new privacy regulations on digital advertising could take a hit on companies like Pinterest, Snapchat and Twitter.

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Digital advertising is supposed to be the fuel of the future, funding new companies (and IPOs) that provide us with services we never knew we wanted — Facebook, Pinterest, Twitter, etc. — while tearing away at our privacy.

But there’s a problem.

Digital advertising is annoying users and starting to creep us out.

I don’t want to see ads for lightweight jackets for the next three months just because I searched for one last November.

And by the way, isn’t that a bit backward? If I already bought the jacket, why is it still being marketed to me?

But advertisers aren’t deterred! In fact, they’re rather emboldened, spurred on by the fact that everyone from Facebook to PayPal will share the most intimate details of their users’ data, allowing companies to tailor their message and target their ads in ways that were unthinkable just a decade ago.

Investors get in on the act by extrapolating the digital advertising revenue of behemoths like Google and Facebook to other companies, then estimating that newcomers like Pinterest and Snap could be worth untold billions.

But what if that doesn’t happen?

Win for losing

What if digital advertising has already reached its plateau because consumers can only see so much social media in one day, which means ads are competing for limited viewing time, and consumers are becoming not just immune but hostile to much of the messaging?

Think about this: Do you watch the ads at the beginning of YouTube videos? Or do you click to another window and do something else for the 15 seconds?

The answers to those questions could lead people to either make or lose fortunes.

Twitter should be sending President Trump flowers for the way the Tweeter-in-Chief revived the struggling company’s presence before he entered into office. Now Twitter has staunched its loss of users and posted a $250 million profit last quarter.

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That’s good money, but does it make the company worth its current market cap of $26 billion? Remember, the company has lost users. Can Twitter really drum up enough digital advertising to justify a 26 price-to-earnings ratio?

Seeking profit

At least Twitter has a profit. Snap, which owns Snapchat, the mobile app famous for delivering pics that disappear in a few seconds, watched its shares soar recently when the company reported a 43% jump in revenue, which cut its losses.

During the conference call, CEO Evan Spiegal said, “This limited our Q4 losses to just 13 percent of our revenue, compared to just one year ago when our Q4 losses totaled more than 50 percent of revenue.”

This company carries a market cap of $15 billion.

And then there’s the latest darling, Pinterest. The newly public firm priced its shares at $19, and they shot to $24 when they opened for trading, valuing the firm at roughly $12.5 billion.

Pinterest earns almost all of its revenue from advertising and managed to lose about $50 million on $755 million in revenue in 2018. The numbers have been improving, and Pinterest might earn a full-year profit in 2019.

Or it might not…

Pinterest
Consumers are getting concerned over their lack of privacy. (Photo by DepositPhotos)

Privacy preferences

At the same time that these firms are banking on higher advertising revenue, consumers around the globe are getting concerned over their lack of privacy.

There’s no question that the privacy genie isn’t going back in the bottle, but we’d like to see companies share less of our data with marketing groups, or else find a way to pay us for our data.

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And that’s the rub. We’ve exchanged our personal details for access to seemingly free platforms like Pinterest and Snapchat, which then monetized the information by selling it to advertisers.

As many people have said: If something appears to be free, then you’re the product.

What happens when regulators demand better safeguards on private data as well as prominent disclosures of what information companies are sharing with others? At the same time that social media platforms are competing for our time, they’ll be restricted in the ways they can make money off of our demographic information and search history.

The result will be less fuel for the presumed profit machines, which should drive down their share prices. Investors who hold such names could take huge hits to their portfolios even as they regain a tiny bit of privacy.

I’m not wishing for anyone to lose money, but I wouldn’t be upset to see some of these companies go down in flames as online advertising takes a hit. If you own stock in Snap, Pinterest, Twitter, or something like it, keep a watch for new privacy regulations and stay updated on quarterly earnings. If you see warning signs, get out early.

You might leave some gains on the table, but you might also avoid ugly losses.

If that happens, you can tweet about it.

(Featured image by DepositPhotos)

DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.

Rodney works closely with Harry Dent at Economy and Markets to study the purchasing power of people as they move through predictable stages of life, how that purchasing power drives our economy and how readers can use this information to invest successfully in the markets. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs and is featured on television where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He too is a regular guest on Fox Business’s “America’s Nightly Scorecard.”Rodney’s book, Irrational Economics, explains the forces that you cannot see but that really drive the economy and markets and can cause your wealth to rise or fall. To survive and prosper, you need the new money rules of the 21st century, which he outlines in this book. He holds degrees from Georgetown University and Southern Methodist University.

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