Search Engine Ad Trends. T-Commerce Fiscal Crisis. DIS, TiVo and More Media Wall St Reports 6/22/12

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Search Engine Advertising Trends

After we wrote about the Barclays Search Advertising Trends conference call last week, the bank was out with some clear takeaways for investors in the space.

1) CPCs down, volume up: While cost per clicks (CPC) are trending down high single digits, search engines are seeing a higher spend overall, more than making up for the gap. For example, search engine marketing leader Performics said it was seeing a 9% increase in search spend Y/Y in 2Q on CPCs that were down 13.3% and volume +37.5%.

2) Mobile causing CPC erosion: CPC losses are driven by increased spending on mobile as well as Product Listing Ads, more relevant search results/ad formats, and clients buying branded terms.

3) Mobile on fire: Massive, rapid growth is occurring right now in mobile. While tablets get 90% the CPCs accustomed to the desktop, smartphones are only at 50%. Mobile search is seen as incremental while tablets more cannibalistic of desktop activity.

4) Search robust through tough economy: Search appears to be shielded from macroeconomic activity and the rise of apps. ROI is clearer with search, making an easier decision for executive sign-off on SEM budgets.

"While vertical search on apps through Yelp, Hotels.com, and others appear to be a threat, Google continues to innovate in vertical search and is developing ways to index within apps and help users find data. While apps tend to have short life cycles, Google (GOOG) should be around for the long haul," Anthony DiClemente, Barclays' Internet and Media analyst wrote in the report.

Disney

It appears customers are searching for and finding a good time with Disney (DIS). Janney's Tony Wible was out with a reiteration of his BUY rating on the diversified media firm.

Disney has invested heavily into its parks over the past few years and those upgrades are coming online now. New attractions at California Adventure should have a direct benefit on attendance and emit a halo effect, tied to "crowd management, food sales, repeat visits, merchandise sales, hotel occupancy, and park hopper demand." Recent data points support this: Crowds camped out overnight and entrance lines snaked for miles at the launch of Cars Land.

The media analyst believes that the $3 billion of incremental park investment could contribute $0.16 to $0.25 per share per year when it fully ramps (DIS is already seeing $500M in incremental revenues from new projects). Wible's got a $49 fair value target on the shares.

T-Commerce and TiVo

In Wible's weekly survey of the media space, he explored TiVo's (TIVO) project with PayPal to develop interactive ads, where people will be able to buy directly on TV using their PayPal accounts. This development plays right into the analyst's view of the future of TV as "a portal for search, social and commerce." Along with others, Apple (AAPL) and Google (GOOG) are busy working on T-Commerce solutions as well, as it would promote their platforms and protect their advertising market share.

Advertising Forecasts

Though Chicken Little has complained about the future of the advertising industry, the sky hasn't quite yet fallen. Growth in the industry typically tracks economic trends and with muted expectations, MAGNAGLOBAL's 2012 advertising forecast finds surprising resiliency.

While Europe is suffering another year of advertising contraction (expected to shrink −0.2%), the research firm expects the industry to grow 4.8% globally (outpacing the 3.5% expected GDP growth). Emerging markets have emerged to account for 25% of global advertising revenues, eclipsing Western Europe's 23% share. MAGNAGLOBAL expects Central and Eastern Europe to grow by 6.4%, Latin America by 9% and APAC by 8.3%. North America, still the largest market ($152 billion), should expand 3.9%.

As to media, television will benefit from the quadrennial events of 2012, growing 5.2% and remaining the largest media globally. Internet is expected to chug along and expand 13.5% (almost $100 billion), topping newspapers with a 20.3% global market share.

Bo Tang at Barclays is a little less optimistic on advertising — this week, he published a below-consensus 3.5% growth target. He blames relatively weak data points surrounding the TV upfront process and a sluggish macro picture. That said, he feels that expectations are low in the media industry, causing stocks in the sector to trade at an attractive 34% P/E discount compared to Consumer Discretionary. He notes that Viacom (VIAB) and Time Warner (TWX) have the least cyclical exposure, return the most capital to investors, and trade at the lowest valuations.

Zynga

Mark May, Internet and Media analyst at Barclays, wasn't playing around this week when he admitted that he had become "less negative" on Zynga (ZNGA). The casual gaming stock is down about 50% from its IPO and is priced at 6 EV/CY12 EBITDA based on his projections. He's still cautious on the name given both a decelerating growth rate and more modest expectations but recommended that bears reconsider their positions. In addition to a better valuation, the analyst believes that continued discussion around legalizing online gambling will benefit the shares. He lowered his price target to $8 (from $10) and wrote that he believes downside is likely $5.

AOL

At the end of last week, shareholders re-elected all of AOL's board members and none of the nominees forwarded by activist investor, Starboard. The stock was down 6% on the news but quickly found its way back to previous trading levels. Needham's Laura Martin believes Starboard more than doubled its AOL investment and was selling after losing the proxy vote.

So, what's next for AOL? The analyst thinks the market "wants to see good execution at Patch with improving financial metrics, as well as continued progress in the subscription and Devil businesses."

TV's fiscal crisis

Pivotal Research's Brian Wieser published this week on the impending fiscal crisis in TV — and when he refers to TV, he really means the general economy. According to the analyst, if the incumbent Congress doesn't act to reverse the expiration effects of the Bush Tax Cuts and a reduction in government spending, we can almost be assured of an economic slowdown.

To illustrate the effects of such a scenario on the TV industry, Wieser writes that in his model, a 1% shortfall in advertising growth would contribute to a -1.7% change in owner ad revenue. Upfront commitments and investments in brands help to insulate national TV from this type of drop, but "the cliff will be scary for the broader population [especially, local media] as everyone else approaches the edge over the course of the year."

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