Shareholders of WPP (LSE:WPP) have endured a truly depressing year so far. The stock is the worst-performer in the FTSE 100 — down 51%! This puts WPP near a 16-year low.
Back in 2017, the advertising group was valued at £24bn. However, its market cap has slid to just £4.3bn, and any further declines could even see it drop out of the FTSE 100.
Challenges
The reasons for the crash aren’t hard to find. Adjusted operating profit dropped 36% to £412m in the first half, with the operating margin worsening from 11.5% to 8.2%. Client spending was under pressure, while CEO Mark Read announced he was moving on.
Meanwhile, French rival Publicis has been winning new business, seemingly at WPP’s expense. It’s interesting to note that the Publicis share price is up 188% in five years, despite the tough macro environment that WPP has long been facing.
Perhaps the biggest challenge is the rapid advance of artificial intelligence (AI). Giant platforms like Google, Meta, Amazon and TikTok dominate digital ad spend, and they’re building self-serve ad platforms powered by AI to automate and optimise advertising.
Consequently, fewer companies may need a middleman like WPP to buy ads. And generative AI tools may start automating the creative side.
Hedge funds sniff a bargain
However, this mighty fall has seen the bargain hunters move in. According to analysis by Panmure Liberum cited by Reuters, hedge funds increased their position in WPP by 44% in the second quarter, making it the second-most bought European stock.
Panmure Liberum reckons they might be anticipating restructuring and disposals that could unlock shareholder value. And that’s possible if WPP manages to reduce its cost structure and emerge as a leaner business.
Reuters quoted new CEO Cindy Rose as saying this to WPP’s 100,000+ staff: “I won’t sugarcoat this, we have a lot of hard work ahead and of course it won’t be easy.“
My fear is that WPP and its army of workers is more suited to the Mad Men ad era than today’s AI-driven world. Finding the right balance between investing in its own AI platform (WPP Open) while keeping the human touch key global clients expect might be tough. It could take some time to get right.
Should I buy WPP stock?
WPP recently cut its interim dividend in half, but City analysts still forecast a 6.3% dividend yield. So there’s decent income on offer, even though I suspect dividend growth won’t be high on management’s agenda.
Will I consider the stock? I’m not looking to invest in advertising at the moment. But for those who are, I think considering Meta, Amazon and Alphabet above WPP is preferable. These companies are innovating rapidly while owning the valuable digital real estate where most online advertising takes place.
More importantly, they have almost unlimited resources to build and launch AI tools, unlike WPP. The biggest danger for each is probably regulatory scrutiny, but that’s a separate matter.
In the near term, I think WPP stock could rally if the new CEO’s turnaround/restructuring plans bear early fruit. I suspect that’s what hedge funds are betting on here. But there’s too much long-term uncertainty for me.
