Rising Privacy Regulations Will Cripple Digital Advertising

Key Takeaways

• Evolving privacy regulations, in-housing trends, and big tech competition threaten Dentsu's data access, client base, and pricing power, pressuring digital service growth and margins.
  
• Ineffective integration of acquisitions and rising transparency demands persistently erode operational efficiency, drive up costs, and compress agency profit margins.
  
• Strong domestic performance, efficiency improvements, AI investments, proactive restructuring abroad, and key leadership hires may drive stability, differentiation, and potential global revenue recovery.

Catalysts

Operates in the advertising business in Japan, the Americas, Europe, the Middle East and Africa, and the Asia Pacific.

• The ongoing and expanding adoption of privacy regulations globally is likely to continually erode Dentsu's access to high-quality consumer data, undermining the effectiveness of its digital advertising and data-driven solutions. As global brands shift budgets towards platforms and partners with robust first-party data, Dentsu may see growth rates in its core digital services slow, directly impacting future revenue generation.
  
• The trend among major brands toward in-housing their marketing activities threatens to contract Dentsu's long-term addressable market, resulting in persistent client losses and a shrinking external agency revenue base, which undermines the expected rebound in international organic growth and places prolonged pressure on top-line expansion.
  
• Big tech platforms such as Google, Meta, and Amazon are increasingly bypassing agencies and securing a larger share of ad spend directly by offering end-to-end automated, data-rich advertising solutions. Dentsu's legacy business model faces accelerated disintermediation, weakening pricing power and likely causing compression in net margins over time.
  
• Persistent failure to successfully integrate global acquisitions and underperforming entities continues to generate operational inefficiencies and prevents realization of anticipated synergies, leading to ongoing restructuring costs, sub-scale operations in key international markets, and dilution of group EBIT margins well into the foreseeable future.
  
• Rising client demand for transparency and measurement is exposing longstanding opacity in agency fee structures across the industry, which is likely to spark further fee compression and lower client retention rates, pushing profit margins below management's mid-term targets despite ongoing cost-saving initiatives.

Dentsu Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Dentsu Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Dentsu Group's revenue will grow by 1.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -13.5% today to 4.5% in 3 years time.
• The bearish analysts expect earnings to reach ¥66.8 billion (and earnings per share of ¥255.42) by about July 2028, up from ¥-191.5 billion 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 10.7x on those 2028 earnings, up from -4.1x today. This future PE is lower than the current PE for the JP Media industry at 16.4x.
• Analysts expect the number of shares outstanding to decline by 1.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.99%, as per the Simply Wall St company report.

Dentsu Group Future Earnings Per Share Growth

Risks

• Dentsu's continued strength in the Japanese market, which accounts for about 45% of group net revenue and has delivered eight consecutive quarters of positive organic growth with high operating margins, could offset international weakness and support both revenue and earnings stability.
  
• The company is aggressively implementing a comprehensive cost control and efficiency program, with a targeted cost reduction of between 35 billion and 50 billion yen by fiscal 2027, aiming to improve group operating margins to between 16 percent and 17 percent, which would support higher net margins over time.
  
• Investments in proprietary AI and data-driven marketing platforms, such as Dentsu.Connect and AIQQQ Studio, have the potential to differentiate Dentsu's service offering, position it for increased revenue in the growing digital and customer experience markets, and enhance future earnings.
  
• Dentsu's leadership has identified and is actively addressing underperforming international segments through reorganization, potential divestment, or revitalization, which, if successful, could prevent future losses and contribute positively to long-term profitability.
  
• New senior hires in critical roles (such as Technology Officer, Global Head of CRM, and Head of Commerce and Experience) along with a focus on talent development, international account wins, and a growing new business pipeline provide reasons to believe top-line growth and revenue recovery in key global regions remain plausible.

Valuation

• The assumed bearish price target for Dentsu Group is ¥2400.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Dentsu Group'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 ¥4600.0, and the most bearish reporting a price target of just ¥2400.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ¥1496.8 billion, earnings will come to ¥66.8 billion, and it would be trading on a PE ratio of 10.7x, assuming you use a discount rate of 6.0%.
• Given the current share price of ¥3002.0, the bearish analyst price target of ¥2400.0 is 25.1% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.