Digital Walled Gardens Will Erode Traditional Agency Revenues

Key Takeaways

• Dominance of digital platforms and in-house AI solutions is shrinking WPP's market relevance, pressuring revenue growth and long-term client retention.
  
• Struggles with digital transformation and tighter data privacy rules drive declining sales, unpredictable earnings, and persistent margin pressure.
  
• WPP's integration of AI, data-driven solutions, and agile structures positions it for sustainable growth, operational efficiency, and strong client retention amid digital transformation.

Catalysts

A creative transformation company, provides communications, experience, commerce, and technology services in North America, the United Kingdom, Western Continental Europe, the Asia Pacific, Latin America, Africa, the Middle East, and Central and Eastern Europe.

• The continued dominance and direct advertiser relationships of digital walled gardens such as Google, Meta, Amazon, and TikTok are systematically reducing the necessity and leverage of traditional ad agencies, which is likely to further erode WPP's market share and drive downward pressure on revenue growth for the foreseeable future.
  
• The accelerating adoption of AI-powered, in-house marketing solutions by major brands dramatically shrinks WPP's addressable market and competitive differentiation, while making it increasingly difficult for the company to win new retainer-based business, creating persistent headwinds for both revenues and long-term client retention.
  
• Ongoing and intensifying data privacy regulations, as well as the impending obsolescence of third-party cookies, undermine the effectiveness of WPP's digital targeting capabilities, threaten the performance and ROI of its proprietary data platforms, and put client spending at risk, leading to ongoing pressure on net margins and client churn.
  
• WPP faces persistent difficulties transforming its legacy operations into a fully integrated, agile digital model. Attempts to centralize operations and invest in new platforms have not been enough to prevent continued declines in organic net sales and prolonged margin compression, as technology investments and restructuring costs erode operating leverage and produce structurally lower net earnings.
  
• Structural industry trends-such as clients shifting budgets directly to digital platforms and bringing marketing in-house-have accelerated fee compression and the move from retainer to project-based work, resulting in less predictable revenues and increased volatility in earnings, impairing the company's ability to deliver sustainable top-line growth.

WPP Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on WPP compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming WPP's revenue will decrease by 13.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.7% today to 5.0% in 3 years time.
• The bearish analysts expect earnings to reach £462.2 million (and earnings per share of £0.43) by about August 2028, up from £381.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.6x on those 2028 earnings, up from 10.4x today. This future PE is lower than the current PE for the US Media industry at 12.8x.
• Analysts expect the number of shares outstanding to grow by 0.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.2%, as per the Simply Wall St company report.

WPP Future Earnings Per Share Growth

Risks

• The rapid deployment and high adoption rate of WPP's AI-powered marketing platform, WPP OPEN, has reached over 80 percent of client-facing staff with growing engagement, and has already enabled large-scale content creation and more efficient campaign execution, which could drive stronger revenue growth and enhance operating margins over time.
  
• Strategic investments and acquisitions, such as InfoSum for advanced data capabilities and Satalia for AI talent, have allowed WPP to offer differentiated, data-driven marketing solutions with predictive analytics, putting it in a position to outperform peers and attract high-value global clients, leading to higher net earnings and long-term revenue growth.
  
• Integration of creative, media, and technology teams into simpler, more agile structures increases operational efficiency and cross-selling opportunities, which should support sustainable top-line growth and margin expansion as structural costs are reduced and operational processes are unified.
  
• Continued strength and growth in high-potential areas-such as healthcare media (C&I), production (Hogarth), public relations (Burson), and enterprise marketing technology (VML Enterprise Solutions)-positions WPP to benefit from secular shifts toward digital, omnichannel, and data-driven advertising, expanding addressable market and bolstering recurring revenue streams.
  
• Maintaining and winning relationships with major global clients (including four of the world's five most valuable companies), alongside strong client satisfaction scores and robust talent acquisition from leading tech and consulting firms, provides WPP with recurring revenues and a solid foundation for future earnings growth and improved financial stability.

Valuation

• The assumed bearish price target for WPP is £3.7, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of WPP's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £5.5, and the most bearish reporting a price target of just £3.7.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be £9.2 billion, earnings will come to £462.2 million, and it would be trading on a PE ratio of 11.6x, assuming you use a discount rate of 10.2%.
  
• Given the current share price of £3.68, the bearish analyst price target of £3.7 is 0.7% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.