Overnight in the U.S., Alphabet Inc. (the parent company of Google) reported second quarter group revenue swelled 21.3% on the back of higher mobile and desktop advertising volume. The internet giant revealed advertising revenue increased a whopping 19.5% to US$19.1 billion in the second quarter as paid clicks rose 29%.
Alphabet’s better-than-expected earnings sent shares soaring over 5% in after-hours trade, putting its share price on track to hit new all-time highs when it opens on Friday. Obviously, this bodes well for shareholders (and people who indirectly own Alphabet shares through ETFs like the Vanguard MSCI Index International ETF (ASX: VGS) and the Vanguard US Total Market Shares Index ETF (ASX: VTS)), but that benefit requires international exposure which most retail investors are unlikely to have .
Whilst I do believe international diversification is essential to a balanced portfolio, investors can potentially capitalise on the trend of growing advertising revenue by buying shares in Australian-listed Adslot Ltd (ASX: ADJ).
Closer to home
Adslot is not your typical household name. The company owns a proprietary advertising portal which allows media agencies to buy and sell advertising space on leading websites (think of it as eBay for advertisers).
According to its website, Adslot has offices in New York, London, Shanghai, San Francisco, Hamburg, Sydney, Melbourne and Auckland, enabling it to connect media buyers and sellers across the globe to deliver a unified trading platform which provides targeted advertising content for clients.
At the heart of Adslot’s operations is its technology platform which integrates seamlessly into clients’ websites, allowing them to easily sell space to advertisers. The technology appears to be well regarded in the industry, with Adslot’s list of exclusive publisher clients including eBay Inc., The Economist and Fairfax Media Limited (ASX: FXJ).
Importantly, media buyers (aka media agencies) buy the space from publisher clients to market a particular product on behalf of their client. This means minimal input is required from Adslot, making its business model akin to a trading platform like REA Group Limited (ASX: REA) and Carsales.Com Ltd (ASX: CAR).
Management revealed results for the June quarter on Friday morning, reporting a rise in cash receipts of 6% to $2.77 million. Whilst this figure pales in comparison to Alphabet’s earnings, the strength of Adslot lies in its scalability of product.
As a large part of its online eco-system is already in place, operating cash flows are relatively fixed, reflected in the 23% decrease of cash outflows for the 12 months ended 30 June 2016.
Although this means it still operates at a loss, Adslot’s current negotiations on a “significant contract” with an international media buying organisation could provide a catalyst to grow earnings and start taking meaningful market share from industry heavyweight Google.
Let me make one thing clear; Adslot is not the next Google. Adslot is a much riskier proposition as the company is still proving itself in the digital advertising market.
What Adslot offers, however, is leverage to online advertising growth, by tapping into this burgeoning market. Although Google remains the gold standard in online advertising, if Adslot manages to win even a fraction of Google’s market share over time, I believe it could be a big winner from current prices.
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Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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