In 2017, WPP made a profit after tax of just shy of £2billion. Right now, their market cap is £14 billion. Are WPP shares a good investment? If the company can start making the kind of profits it was enjoying three years ago; the answer is surely yes. Indeed, I would go further, if (and it is a big if) the above conditions can be met, WPP shares are at a bargain price.
WPP’s challenge and opportunity can probably be best summed up in one word, or one name to be precise. That name is Accenture. WPP’s rivals are no longer just advertising/communications companies. These days it competes with consulting companies. These days the weapon that companies like WPP must wield to be successful is data.
A year or so ago, at the Cannes Lions festival, Martin Sorrel, the man who did so much to make WPP the force it became, said: “Accenture is 1.5 times bigger than all six [leading communications] holding companies put together…The lines are blurred… If you look around where the investment is being made at Cannes, the biggest investment here is from consulting companies. That is where the challenge is to agencies. But they don’t compete with us head-to-head, they go upstairs.”
Sorrel maintains that the advertising/communications business is being disrupted by digital to the extent that it will soon be barely recognisable from the industry it is today. He appears to suggest he doesn’t think WPP can make the switch.
In another interview, Sorrel said: “They (WPP) are still stuck with the fundamental problem: 60-70 per cent of their business is in traditional…it is still very vertical, they talk about simplifying the business, but all they’ve done is strengthen the verticality. That makes intra-vertical competition even more acute.”
So that is the WPP challenge.
Listen to Sorrel, and you might conclude that WPP is about to go the way of Kodak or Blockbusters.
But then, if you listen to Mark Read, WPP’s new (ish) CEO, you get a narrative that I, for one, find encouraging. Read is aware of the disruptive threats and is grappling with them in a way I like.
That is where Accenture enters the tale again. Read was reported as saying WPP does not participate in pitches led by Accenture. He subsequently said that he didn’t remember saying that but that, but “we do have concerns about sharing information with other companies and how that’s being used.”
I think this illustrates my point. WPP is not just competing with the likes of Omnicom and Publicis Groupe but with the likes of Accenture too. Of course, this is a threat to the business, but it is also an opportunity for significant growth.
Back in October, WPP said that it expects revenue growth of between 11.5 and 12 per cent in 2021. The company’s third-quarter results were very impressive.
Read says: “Clients across all sectors and geographies are making significant investments in marketing, particularly in digital media and eCommerce services,
“We are now above 2019 levels in all of our business lines, and with the actions, we have taken over the last three years, we are even better positioned for growth.”
Can WPP compete in the digital arena? Can it learn how to become a master of data? What about the Metaverse? Can WPP tackle the changes this might entail? Above all, can WPP embrace the great gales of disruption that threaten its business?
If it can, shares can rise much further. I think that under Read it can meet these challenges and turn them to its advantage.