It has been an impressive year for some shares in the flagship FTSE 100 index of leading companies. Indeed, the Footsie has hit new all-time highs this year, albeit with a fair bit of market volatility thrown in along the way.
But not all FTSE 100 shares have done well. One, for example, has lost around a third of its value so far this year.
There are potentially existential changes taking place in its industry that could see things get much worse even from here. On the other hand, this might turn out to be one of those turnaround situations that looks obviously like a bargain buying opportunity when seen in hindsight a few years later.
Strong position but suffering from industry uncertainty
The company in question is advertising group WPP (LSE: WPP). The holding company owns a number of leading global ad agencies, such as Ogilvy and Grey.
In general, that has been a license to print money. Performance has moved around over time, but last year the company reported £542m of net profit on revenue of £14.7bn. The company’s profits help to support a juicy dividend. The current yield of 7.2% is over twice the FTSE 100 average.
So why the share price fall? In short: artificial intelligence (AI). Investors are panicking that large amounts of the sorts of ad buying and placement currently done by agencies could be done by AI instead.
That risks cutting agency middlemen out of the transaction, leading to big falls in both revenues and profits. Ad creation could also be done by AI. Much of it already is. That is a further risk to WPP.
I think there’s a lot to like
The challenges are serious. The company announced this month that the chief executive plans to step down.
But often risk and opportunity are two sides of the same coin. I do see AI as a risk to a lot of WPP’s traditional revenue streams. But it can also be a powerful cost-cutting tool for the company to apply in its own business. From its partnership with and investment in generative AI developer Stabiity AI to integrating new AI tools into its internal platform WPP Open, the ad group has been proactively seeking to use AI to help its own business.
I also think that, in a sea of inexperienced AI start-ups that do not understand the ad market, WPP’s long, deep, global experience is a real asset that can help it stand apart. Advertising demand can ebb and flow, but it will remain substantial over the long term.
I see that as an enormous asset for WPP. It remains proven, has a large pool of creative talents and has navigated seismic shifts in the ad market before, such as a widespread move from television to digital ads.
My hope is that WPP can do the same again and ultimately turn AI from a possible risk to a driver for ongoing growth.
In my experience, turning around a business that remains solidly profitable is different to one that is slipping ever further into the red. I have bought WPP shares for my portfolio and plan to hang on to them.
