For many decades, the primacy of television as the main advertising channel to reach a mass market audience was unchallenged. In fact, entire industries sprang up around the unparalleled ability that TV had to reach millions simultaneously.
But the rise of smartphones and tablets has eroded the effectiveness of TV as an advertising medium, as many TV viewers utilise their "second screen" during commercials.
But the same technology that gave us smartphones and tablets is also being used to great effect in another previously unanticipated area for profitable advertising: digital out-of-home advertising.
The digital advantage
Where previously out-of-home advertising was limited to large poster-based billboards in attractive locations, now, digital advertising has given companies a much more novel way to reach customers.
For example, digital billboards are far more responsive to changes in conditions and news, with companies able to tweak the messages weekly or even daily to ensure relevance and drive customer engagement.
The metrics underpinning the industry are also strong, with digital out of home as a category growing 10% according to recent figures, with growth shown in over 90% of the last 20 quarters.
About 5% of all advertising spending is currently allocated to digital out of home, with over 30% for TV and 15% for newspapers. Just as Realestate.com.au and Domain.com.au stole advertising dollars from traditional newspapers as the industry shifted to digital, it is clear that digital out of home stands to benefit from more advertising dollars being shifted away from TV and print.
In addition, plenty of prime advertising space currently being occupied by traditional poster billboards will transition to digital over the next few years.
So what are the best stocks to gain exposure to this trend?
Two standout options
APN Outdoor Group Ltd (ASX: APO) is one of the best IPO performers of recent times, with the stock price having doubled from the initial price. The group recently was able to update the market with a surprise profit upgrade, with a forecast result 50% higher than the previous corresponding period as its asset base expanded and clients were willing to pay more for advertising space.
The company has also committed to meeting this increased demand, with the rollout of 17 more digital panels in the near term. The strong share price of APN Outdoor is also a positive as the company has options to raise capital or borrow in order to fund a more aggressive expansion of screens if management chooses to do so.
The strong balance sheet has also allowed the company to act as a consolidator in the space, buying up existing billboard space with plans to convert it to digital, as evidenced by the recent buyout of Adspace Outdoor, which added 11 attractive advertising locations to the portfolio.
oOH!Media Ltd (ASX: OML) may have a name that is the bane of all writers, but its share price has also more than doubled in the last 12 months.
Similar to APN Outdoor, OML has been focussed on buying attractive assets. However, it is pursuing a slightly different strategy, outlaying $45 million for the purchase of Inlink Group, an established out-of-home digital media company.
While the price is higher than that paid for non-digital assets, the acquisition allows a much faster audience growth as Inlink has over 2,800 digital screens placed in gyms, office buildings and cafes across Australia. In fact, chances are you are one of the 2.2 million Australians weekly who view advertising on Inlink screens.
Foolish takeaway
Of the two stocks, oOH!Media Group is the more attractive proposition due to its diversity of screens and the rapid scale to a wider audience that the Inlink acquisition gives it, although both will continue to benefit as advertising dollars continue to flow away from TV and print.
