Google's privacy update walloped ad tech shares, but analysts still see these four stocks as a buy

Published Wed, Mar 10 20216:41 AM ESTUpdated Thu, Mar 11 20218:27 AM EST

A clarification on how Google will approach targeted ads starting next year, which came amid a market sell-off, has caused a lot of pain for ad tech stocks in recent days. But some analysts see this as the perfect opportunity to get in on the sector. Ad tech has recently seen a resurgence, with a slew of new entrants like sell-side advertising player PubMatic , demand-side ad tech company Viant and digital ad platform Kubient . Meanwhile, more mature public ad tech companies like The Trade Desk and Magnite have seen stock prices and market caps soar in recent months. But The Trade Desk and its peers saw stocks tumble late last week after Google's latest guidance Wednesday on its promise not to use technologies that track people individually across the internet. Stocks in the sector were also in the red amid a broader sell-off that was hurting high-flying tech stocks. Nevertheless, some analysts see this as the opportunity to buy some certain ad tech stocks, which they say are well-positioned to perform well in the long term despite some short-term volatility. The Trade Desk Ad tech darling The Trade Desk, which has technology that helps brands and agencies reach targeted audiences across media formats and devices, as of early last week had seen its stock catapult 183% year-over-year. The Trade Desk closed up nearly 6% Tuesday to $719.32, but shares were still down nearly 10% since the previous Tuesday's close. The company has led the formation of Unified ID 2.0 , which will rely on email addresses that are hashed and encrypted from consumers who give their consent. The Trade Desk paints the identifier as a superior alternative to cookies that better explains to consumers how relevant advertising funds the content and experiences they read or use on the internet. The Trade Desk passed control of Unified ID 2.0 last month to a nonprofit called Prebid. Unified ID 2.0 is one of the industry's initiatives for a world without cookies, or bits of code stored on your browser that advertising companies use to show you ads tailored to your interests. Cookies are used to track users across multiple sites to target ads and see how they perform. But Google announced in January 2020 that its Chrome browser, the most popular web browser in the world, would end support within two years for third-party cookies. Google said last week that it will use "privacy-preserving technologies″ that only rely on methods like anonymization or aggregation of data after it stops supporting cookies. The company suggested methods based on email addresses wouldn't meet rising consumer expectations for privacy, "nor will they stand up to rapidly evolving regulatory restrictions, and therefore aren't a sustainable long term investment." KeyBanc analysts upgraded The Trade Desk stock in a note Sunday, in part titled: "AdTech Goes Gluten Free," joking about a healthier industry without cookies. In the note, analysts said that The Trade Desk stands to benefit from share gains as Unified ID 2.0 adoption increases. It also cited the company's traction with connected TV and retailer partnerships with companies like Walmart as further reducing a dependence on cookies. KeyBanc's Justin Patterson said Trade Desk CEO Jeff Green characterized the situation well by saying that Google is sacrificing a small part of its business. "The trade-off is that Google no longer values serving ads on the rest of the internet as much — certainly not as much as they once did," Green wrote in a blog post last week. Moving forward, The Trade Desk would have better targeting capabilities around the percentage of the population that logs into Unified ID 2.0. Patterson said it doesn't require the entire internet logged in for the ID to work, but that it will be a small percentage driving attractive pricing and better return on investment for advertisers. Patterson said that The Trade Desk's new partnership with Walmart is another interesting element. The companies announced in January they were building a demand-side platform that will use Walmart shopper data to place targeted ads across the web, not just on Walmart's own sites. "I suspect you'll also see more retailers partner with the Trade Desk over the coming months," Patterson said. Wells Fargo analysts said that recent weakness in LiveRamp and Trade Desk shares is largely reflective of the evolving macro backdrop and sector rotation. The analysts said Google's announcement has also contributed. They said they see Google's announcement as a "clear positive" for The Trade Desk. Magnite Ad tech company Magnite, operates a sell-side advertising platform that helps publishers of websites, apps, streaming TV channels or other digital media properties that sell ad space, saw shares up nearly 17% Tuesday to $43.30. But shares have been stung by last week's activity, with its stock price down 14.5% since the prior Tuesday's close. Susquehanna analysts suggested investors should "be greedy when others are fearful" in a Monday note, in which it said the Google announcement is positive for Magnite. It added that the pullback has created a "great opportunity for long-term-oriented investors." Magnite is collaborating on Unified ID 2.0. The company's chief technology officer and Prebid chairman Tom Kershaw responded to Google's update last week in an AdExchanger column , saying "Google's announcement, which was made by Google's Ads team, not Chrome, will have no impact on email-based identity systems such as UID 2.0 and LiveRamp's ATS. These solutions will continue because they are based on consumer choice and opt-in." Magnite also has its own audience segmentation tools for ad targeting. The company said on its third quarter 2020 earnings call that 10% of its revenue was generated from audience segments it creates on the Magnite marketplace and believes related revenue will more than double by the end of 2021. Susquehanna analysts said Google's changes would likely reduce effectiveness of its ad tech assets, including its supply-side platform. They anticipate share shifting to Prebid. "MGNI will also likely gain share in the exchange market as it will likely solicit higher bids because of its use of identifiers," they wrote. Susquehanna analysts added that they believe the connected TV (CTV) space should benefit from Google's announcement last week, since a lesser ability to reach consumers online might drive advertisers to move budgets to CTV. "CTV publishers and advertisers will be able to adapt to new privacy changes more easily because CTV already utilizes cohort targeting," they wrote. Viant Viant, which went public in February but saw a number of analysts initiate coverage Monday, is also viewed as a company that has room to grow. The company operates a demand-side advertising platform, or DSP, called Adelphic. But those shares have also stumbled following last week; Viant closed up 4.3% on Tuesday to $39.56, down 21.85% since the previous Tuesday's close. Needham initiated coverage of the stock with a buy rating Monday, saying that it is "largely immune to the fallout from cookies" since it uses household identifiers to target ads on its demand-side platform. They did note that confusion in the market about whether cookies being deprecated could hurt all demand-side platforms and open internet parties, and thus adds volatility to the share price. Canaccord Genuity analysts also initiated coverage at a buy, with a price target of $52. JMP analysts said Google's updated guidelines last week and the sunsetting of third-party cookies could act as a tailwind for Viant. JMP gave Viant a market perform rating since shares are up 73% since its IPO in February. The analysts said they would look for a better entry point. They said Google's approach could open up some ad budgets that were on Google products to other platforms like Viant, as marketers want to keep using email and other specific targeting tools. JMP analysts said they view Viant's approach as one that will be more appealing to advertisers going forward. In another note, BofA likened Viant's entry into the market a "David vs. Goliath story, inside a Godzilla vs. King Kong movie." In that analogy, Viant is the David to The Trade Desk's Goliath, where both are battling it out "right at the feet of the rampaging 1,000-foot tall radioactive lizard of the ad tech space Google." Analysts initiated Viant with a neutral rating. "This chaos as the advertisers internalize the changes proposed by Google and later likely enforced by regulators may give Viant the opportunity to gain share; at least until these standards change again, as we expect they will," BofA analysts wrote. Criteo French ad tech company Criteo said last week that Google's post "does not in any way change or impact Criteo's plan and roadmap." The company announced in October its involvement in collaborating with Unified ID 2.0. In doing that, it will provide the sign-on solution and help develop a "transparency portal," which gives consumers more control over their advertising experience. Criteo closed up 5% Tuesday to $33.55, but were down 2.64% since the previous Tuesday's close. Berenberg analysts said they were reiterating their buy rating on the stock Friday, saying that Criteo could stand to win market share as a result of the news. Criteo has traditionally operated heavily in the retargeting space, but has been repositioning itself to focus more on e-commerce. They said Criteo now looks even better positioned to drive growth with Google pulling out of the kind of targeting that Criteo does. They added that their estimates already reflect privacy changes from Apple and Google this year and next year, and believe their assumptions are conservative. For Berenberg analysts, Google's announcing that it wouldn't build its own alternate identifier is also a positive for companies helping with Unified ID 2.0. "With one less identifier in the market, we think UID 2.0 will succeed in attracting even more support: if Google had built an alternative of its own, that could have fragmented the market," they wrote. -- CNBC's Michael Bloom contributed reporting.

The French online advertising company Criteo's logo is seen at the Criteo headquarters in Paris on October 3, 2019.

Eric Pieront | AFP | Getty Images

Ad tech has recently seen a resurgence, with a slew of new entrants like sell-side advertising player PubMatic, demand-side ad tech company Viant and digital ad platform Kubient. Meanwhile, more mature public ad tech companies like The Trade Desk and Magnite have seen stock prices and market caps soar in recent months.

But The Trade Desk and its peers saw stocks tumble late last week after Google's latest guidance Wednesday on its promise not to use technologies that track people individually across the internet. Stocks in the sector were also in the red amid a broader sell-off that was hurting high-flying tech stocks.

Nevertheless, some analysts see this as the opportunity to buy some certain ad tech stocks, which they say are well-positioned to perform well in the long term despite some short-term volatility.