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Internet Industry: Slowdown in Ad Sales Growth Inevitable in 1Q20
Ad Market Sensitive to Economy
Internet Industry: Slowdown in Ad Sales Growth Inevitable in 1Q20
  • By Ahn Jae-min
  • March 11, 2020, 18:23
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The author is an analyst of NH Investment & Securities. He can be reached at -- Ed.


The economic downturn due to Covid-19 is negatively influencing ad market conditions. Ad sales growth at Internet firms started to slow from February, which is likely to weigh on their short-term earnings. While search ad sales are less sensitive to economic conditions (as they are related to online commerce), a slowdown in display ads appears inevitable.

Ad market sensitive to economy; earnings growth to slow in 1Q20

With domestic economic indicators slowing down due to Covid-19, a reduction in ad spending (a leading indicator) is inevitable. A decline in ad sales at Internet firms since February is likely to negatively impact their 1Q20 results. While the effect on search ad sales should be limited by increased indoor activities and e-commerce transactions, a slowdown in the overall ad market appears inevitable.

That said, despite predicting a decline in ad sales and OP, we maintain a Positive stance towards the Internet industry.

According to KOSTAT, online GMV in January came to W12.4tn (+15.6% y-y, -2.3% m-m). Considering that the travel and transportation service portion of GMV stood at 12.5% in January and the food service portion came in at 8.5%, we believe that GMV growth will recover in February. That said, the possibility of a downturn in search ads and keyword ads still exists.

2020 investment points remain valid, but short-term obstacles exist

As investment points for Internet players (commerce, fin-tech, contents, etc) remain intact, we maintain our positive stance towards such firms. However, the ad business, a cash cow for Internet players, will likely be dampened by Covid-19, dragging down the firms’ 1Q20 results.

Thanks to the merger of LINE and Z Holdings, NAVER’s major loss-making business (LINE) will be excluded from its consolidated results from 2Q20. NAVER Financial’s expansion into new business arenas and NAVER Webtoon’s solid growth are also positive.

Kakao has a high portion of display ads, but its major growth driver, Talk Biz-board, should be relatively unaffected as it is based on a mobile messenger platform. The growth potential of the firm’s subsidiaries, including Kakao Bank, Kakao Pay, Kakao M, Kakao Games, and Mobility, also remain valid.