Alphabet, Meta and Pinterest best positioned in digital advertising - Goldman Sachs

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By Sam Boughedda

Goldman Sachs analysts said the firm is taking a more conservative stance on Q4, as macro headwinds continue to weigh on consumer sentiment and spending across the eCommerce and digital advertising sectors.

"For e-commerce, we expect growth to slow in Q4'22, as US Holiday online spending growth is expected to reach its lowest point in recent history (+2.5% YoY, per Adobe (NASDAQ:ADBE)) and as International (with a focus on Europe) remains an area of relative underperformance, with potential for further deterioration ahead," wrote the analysts. "When framing their Q4'22 guidance, companies adopted a cautious tone and touched on consumer wallets facing more constraints (from macro/inflationary pressures), a highly promotional environment (affecting pricing and competitive intensity) and still-difficult YoY compares vs. the 2021 Holidays (when online still benefited from COVID-related stay-at-home measures)."

They added that in e-commerce, the firm's Buy-rated stocks in Amazon (NASDAQ:AMZN) and Etsy (NASDAQ:ETSY) reflect its preference for profitable and scaled players with higher growth profiles, resilient models supported by platform breadth, category diversification and more favorable end-market exposure, and its expectation of continued market share consolidation within e-commerce.

Meanwhile, for digital advertising, the analysts said a key theme of the Q3 EPS season was the extent to which a number of macro headwinds are driving decelerating growth for the fourth quarter and into 2023.

"These headwinds caused Q4'22 outlooks from most companies to be fall inline to below prior expectations. While visibility into Q4'22 remains low, we see the potential for a year-end 'budget flush' for certain platforms (especially within key verticals such as retail) if the consumer spending environment remains relatively more resilient and a more moderate digital ad pricing environment supports more attractive ROI," the analysts explained.

As a result, Goldman Sachs sees its Buy-rated stocks in Alphabet (NASDAQ:GOOGL), Meta Platforms Inc (NASDAQ:META), and Pinterest (NYSE:PINS) as best positioned within the digital advertising space.