Is WPP Stock Undervalued?

The advertising industry is finally getting back on track after many companies decreased their ad spend in 2022 and 2023. London-based media holding company WPP plc (NYSE:WPP), which won the title of largest advertising company last year, was particularly hard hit by the recent market conditions.

Lower revenues resulted in a drop in share price, disappointing shareholders, but new investors wonder if now is the time to buy WPP stock at a relative discount.

WPP plc stock dropped by 10.9% over the past year and is currently trading lower than its 50-day moving average, which indicates a weak price trend. However, the market has repeatedly seen beaten-down stocks make a comeback thanks to strong underlying fundamentals or an attractive valuation so will that be the case for WPP plc?

How Is The Advertising Market Doing?

The economy delivered mixed results over the last year. Consumers and businesses considered declining inflation to be an encouraging sign, but uncertainty was the primary sentiment.

For the most part, companies outside of the technology sector took a cautious financial stance, and reevaluated their media budgets. This is often the first line item to be cut when attempting to reduce expenses and so it wasn’t a surprise to see history repeat once more.

Ad spending forecasts didn’t become more optimistic until midway through 2023. The days of unrestricted ad spending are gone—at least for now—but there is a clear upturn industry-wide. Digital advertising may not see the wild growth experienced in its early days, as it has transitioned into a mature market, but steady growth appears inevitable.

Ad spending is projected to hit a substantial $1.08 trillion this year. TV and video advertising are expected to make up the largest segment, with a market volume of $337.50 billion.

Analysts have indicated that 79% of total ad spending will come from digital sources in 2029, and the market for global advertising agencies is expected to reach $584.28 billion by 2032. This reflects an underlying CAGR of 5.5%.

Growth Is Slowing But By How Much?

Since 2018, WPP plc has gone through a complete reorganization. The company simplified its operating structure by retiring many of its legacy brands, closing inefficient offices, and disposing of non-core businesses.

Today, WPP’s operations focus largely on marketing communications that help brands expand their businesses and  is made up of several distinct operating segments, including integrated network, media, data and insight, public relations and public affairs, brand consulting, production, and health and wellness.

Over the past three years, WPP has experienced year-over-year growth in its top line but formerly strong revenue growth has shown signs of tapering off. It went from healthy double digits in 2021 and 2022 to a low single-digit value between 2022 and 2023. Total revenue for 2023 came in at just £14.84 billion (~$18.83 billion).

This slowdown has been attributed to softening operations in North America. Specifically, revenues from technology and retail clients has dropped off in the North American market. At 39%, the United States is responsible for the most significant portion of global ad spend. China is a distant second at just 16%.

WPP plc shares revenues minus pass-through costs in its financial reporting. For 2023, that figure totaled £11.9 billion (~$15.2 billion). That figure does not include fees paid to external suppliers when they are engaged to perform some or all of a particular project. In that situation, the fees are charged directly to clients. It also rose at a slower rate over the past three years compared to prior years.

In the win column, WPP reported a 2.6% compound annual growth rate from 2019 to 2023, and business leaders noted that the company’s operating profit margin has stabilized.

Perhaps more importantly, adjusted net debt went from £4.1 billion (~$5.3 billion) in 2018 to £2.5 billion (~$3.2 billion) in 2023.

Finally, WPP plc announced that between buybacks and dividends, it has returned a total of £4 billion (~$5.1 billion) to shareholders.

The company won $4.5 billion in net new business billings over the last year, which was lower than the prior year. The decline was partly due to the loss of key Pfizer creative assignments but WPP plc also reported notable client wins.

In the first quarter of 2024, WPP secured business from notable companies like AstraZeneca, Canon, Molson Coors, Nestlé, and Telefónica.

This year, top line guidance is quite low at -0.1% growth in like-for-like revenue (less pass-through costs). Management expects headline operating profit margin improvement of 20-40 basis points (on a constant currency basis).

New AI Studio Launch

WPP recently launched a new production studio that is an AI-enabled production application built on NVIDIA Omniverse technology.

The studio is featured in WPP Open, the company’s intelligent marketing operating system.

As AI becomes takes on a bigger role in the content creation landscape, this may prove to be the company’s most lucrative path forward.

Is WPP Undervalued?

WPP is 6.6% undervalued according to the 2 analysts covering the company who have a consensus price target of $49 per share.

A 10 year discounted cash flow forecast model paints a much more attractive upside opportunity for new investors with a fair value assessment at $73.04 per share.

Caution is certainly warranted however when looking at the price-to-earnings multiple, which is elevated at 69.5x, particularly at a time when the market is looking to punish companies with lofty valuations.

A company producing $18 billion in revenues really needs to be generating more than $250 million in profit to keep the bears at bay, and so WPP may be in jeopardy at a time when bullish sentiment is softening.

Still, trading at just 0.5x last twelve months sales it’s difficult to make an argument that bears can overly aggressive.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.