MoffettNathanson Research

After years of “uber-bullishness” on digital advertising, MoffettNathanson is lowering its long-term ad forecasts. This week’s profit warning by social media company Snap was the immediate trigger, however, the firm says it has concerns about the long-term growth prospects of digital advertising overall.

In a new report – entitled “U.S. Advertising: It’s Not Just A Cyclical Problem – Revising Down Our Long-Term Bullish Forecasts” – MoffettNathanson says it is “very concerned” that the 2021 ad market was underpinned by both “unsustainable corporate profitability” and the explosion in e-commerce activity by small and medium sized businesses. Those growth drivers are now “succumbing” to a combination of factors. As a result, the firm is lowering its long-term online ad growth forecasts to a compound annual growth rate of 12.5%, from 18.5%, for the 2021-2025 period. The numbers don’t factor in the impact of a recession, should one occur.

Boiling its thesis down to the most basic terms, MoffetNathanson says the recent ad market was driven “by an unprecedented spike in profitability at the largest companies” due to pandemic-related cost cutting. That enabled a bigger expansion of ad spending. “That spending should be pared back as these costs rise in the coming years,” the report says. Meanwhile, the pandemic helped speed up the growth in ecommerce, creating a bubble in spending by small and medium size businesses “that is also likely to be popped.”

What’s it mean for the U.S. ad market as a whole? MoffettNathanson’s revised forecast calls for U.S. advertising to grow at a 9% compound annual growth rate from 2021-2025, down from its earlier estimate of 13% growth. The Top 100 U.S. advertisers will up their spend by 7% during this period while the “long tail” of small and medium-sized businesses will increase by 10%.

The call is for online advertising growth to moderate to the low double digits over the next several years from the mid-double digit range pre-pandemic. TV ad spending is expected to be slightly down in 2023.

A slowdown in online ad spending “was inevitable at some point,” the report says, after it surpassed TV as a share of U.S. advertising in 2018. The revised outlook calls for online to account for 61% of the market in 2022 before climbing to a 68% share in 2025. Meanwhile, TV’s share (including advertising-based video on demand) will fall from 27% in 2022 to 23% in 2025.

While MoffettNathaonson has reduced its estimates for both the ad market and online advertising, it believes that so-called bottom of the funnel will take the most share over the next few years reaching 37% of U.S. ad spend by 2025, up from its 32% share in 2021.

The firm confirms the U.S. radio market roared back in 2021 to $15.9 billion in revenue, up from $12.8 billion in COVID-impacted 2020 for a 25% year-over-year increase. For 2022 and beyond the forecast calls for an annual decline of 3% through 2025. MoffettNathanson includes both radio’s digital assets and traditional assets in its ad model.

The MoffettNathanson Ad Tracker is based as a quarterly analysis of U.S. advertising trends using publicly-reported, quarterly financial results. Its database tracks reported advertising revenue for 43 U.S.-listed, large-cap, advertising-supported media companies which in total had around $240 billion in ad revenue in 2021, or around 83% of the total U.S. measured-media ad market.