In a world in which a handful of tech companies which derive the bulk of their revenues from advertising are the market leaders, what happened to WPP Plc - the world's largest ad agency - this morning is particularly relevant: the company suffered its biggest one day crash since 1999, tumbling as much as 15%, after CEO Martin Sorrell again slashed the company's profit outlook and predicted another year of no growth, in what Bloomberg dubbed a jarring reminder to investors "that the advertising industry is undergoing its most dramatic upheaval in decades."
To be sure, WPP's woes are hardly new, with the company tumbling almost as much back in August when it reported dismal earnings and unveiled "terrible" guidance. This time it was even worse.
WPP unveiled that its long-term earnings growth will be as little as 5% and twice that at best, slashing its previous guidance of as much as 15%. The year got off to a “slow start,” WPP said, continuing a trend from 2017 that saw flat margins and sales. Investors responded by sending shares down by the most in 19 years, resulting in a brief trading halt. In sympathy, Publicis Groupe SA, WPP’s French rival, dropped as much as 6.1%.
“There’s a real sense of shock and awe at what’s happened to his business model,” media analyst Alex DeGroote told Bloomberg. “This is a stark reminder of the significant challenges WPP faces.”
On one hand, the WPP crash may seem good news for its digital competitors as the steep slump of the industry leader is the most dramatic sign yet of the deepening crisis facing Sorrell as companies like Google and Facebook "hollow out his core business."
On the other hand, and more ominous to the tech vanguards, WPP's collapse may be a harbinger of broad weakness coming to the advertising market, which in turn could wreak havoc on tech valuations: after all major customers such as Unilever Plc have announced they are holding back ad spending to cut costs, a rallying cry which has been joined by many other companies.
There is another red flag: as Bloomberg notes, WPP’s advertising sales have long been seen as a bellwether of strength in the global economy, as companies tend to expand or cut their marketing budgets depending on how well their businesses are performing.
As such, today's historic crash suggests that ad spending in tumbling, a clear indicator of a global economic slowdown.
Thursday’s stock slump deepens an already poor performance of WPP, which lost more than a quarter of its value over the course of last year, as discussed previously.
Having founded the company in the 1980s, Sorrell is the biggest individual shareholder at WPP, with a stake of about 1.4 percent.
The ad giant said it’s responding by trying to break down silos among its various creative, ad buying, strategy and public relations businesses to draw on top talent and seamlessly serve clients. After “not a pretty year” in 2017, WPP is “upping the pace” of its effort to combine its global team, Sorrell said.
“In this environment, the most successful agency groups will be those who offer simplicity and flexibility of structure to deliver efficient, effective solutions – and therefore growth – for their clients,” he said.
For now, the WPP weakness has yet to spread to the ad-funded FANGS, as traders give the market leaders the benefit of the doubt for now.