Nearly a year after the stock of advertising giant Interpublic crashed, following a stark warning about the decelerating state of the legacy advertising business, that other ad giant, Omnicom, decided to prove it right, and on Tuesday it suffered its biggest stock crash since the start of the millennium after posting unexpectedly poor earnings, reigniting fears whether traditional ad giants can weather media disruption unleashed by Google and Facebook.
The stock plunged over 9% as low as $70.64 after the company posted weaker-than-expected revenue growth of 2% in the second quarter.
According to Bloomberg, Goldman described the sales slump as the worst growth in North America since the recession, resulting in the sharpest intraday plunge in OMC stock in 17 years.
The reason behind the sharp drops among these traditional ad giants is that increasingly more ad clients are moving their ad spending online where names like Google and FaceBook enjoy a duopoly. The decline in market share will make it increasingly more difficult for traditional advertising agencies to maintain growth and earnings.
Bloomberg Intelligence analyst, Paul Sweeney, said that ad-account losses and general uncertainty in U.S. digital media are dragging down Omnicom’s organic revenue growth, as North America accounts for more than half of the company’s sales. Meanwhile, the company’s margins also are under pressure, hindering efforts to focus on more profitable businesses.
“Omnicom’s 2018 margin outlook is disappointing, with the company expecting stable margin even as it pruned its portfolio in 2017,” Sweeney said in a note.
One wonder what will happen to legacy ad companies if and when Amazon decides to really throw its weight behind the online ad business and to cement the Google-Facebook-Amazon dominance over yet another industry.
Alternatively, one wonders what happens to the online ad companies when the next recession really hits and marketing budgets are decimated. As a reminder, during a downturn, ad dollars are the first to go.
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