WPP (LSE: WPP) shares were nosediving this morning (4 August) after the world’s largest advertising agency lowered its full-year guidance in its H1 results. As I write, the FTSE 100 stock is down almost 7% to 789p.
This leaves the share price over 34% lower than it was five years ago.
Is this pullback an opportunity to add some shares to my portfolio? Let’s take a look.
Lower US tech spending
The standout news in the group’s earnings update was that its profits are suffering from a weak US advertising market.
As a result, it lowered its full-year guidance. Having previously anticipated revenue growth of 3% to 5%, it now expects like-for-like growth of 1.5% to 3%.
The main reason for this downgrade was lower sales in the US from its technology sector clients during the second quarter. These companies are delaying spending on technology projects amid widespread economic uncertainty.
Revenue in the six months to June increased 6.9% to £7.2bn, but pre-tax profit of £204m was down 51% from the same period last year. Earnings per share fell 55% to 10.3p from 22.7p.
Excluding the US, growth did actually accelerate to mid-single-digits, although China grew less strongly than expected. Its businesses in the UK, Europe, Latin America and Asia-Pacific all expanded.
However, when large US tech clients push the pause button on marketing spend, that’s not great news for the likes of WPP.
Some positives
There were some bright spots in the report. One was that its headline operating profit margin of 11.5% remained stable. Also a positive for investors, the interim dividend of 15p per share was maintained.
Plus, full-year net debt isn’t expected to increase, with the firm on track to deliver at least £450m of annual savings this year.
Chief executive Mark Read also highlighted new business assignments with major clients. These include Reckitt, Mondelēz, easyJet, Lloyds Banking Group, Pernod Ricard, and India’s second largest advertiser Maruti Suzuki.
So the new business pipeline remains solid, with $2bn net new billings in H1, which is more than in the same period last year.
Embracing artificial intelligence
One thing I find attractive about WPP is that it’s very forward-thinking. It has partnerships with the leading players in artificial intelligence (AI), including Adobe, Google, IBM, Microsoft, Nvidia and OpenAI.
In May, it announced a deal with Nvidia to build a generative AI-enabled content engine for digital advertising. This should make producing ads quicker and more efficient, which could boost margins and profits.
Will I buy the shares?
There doesn’t appear to be anything wrong with the business, I feel. It’s no secret that the advertising market is cyclical, which means businesses reduce ad spending when consumers are less likely to spend.
Competitors such as S4 Capital and Interpublic are facing exactly the same headwinds associated with reduced marketing spend in the US. Things could worsen if the US enters a recession, but downturns don’t last forever.
So, this could be a good buying opportunity for investors patient enough to ride out the slowdown. The stock is already pretty cheap and pays a dividend.
If I had spare cash and was looking to gain exposure to the global advertising market, I’d buy WPP shares today.
