AI-driven capital expenditures are changing the landscape for advertising giants like WPP PLC (LSE:WPP), say analysts at UBS, which cut their forecast for the FTSE 100 company as tech companies pivot their spending priorities.
The downgrade to expectations follows the updates from the sector in recent weeks, which included WPP slashing its revenue outlook for the second time in as many months as US tech clients became more cautious.
In light of tech firms allocating operational expenditures into artificial intelligence and cloud infrastructure, UBS now forecasts organic growth for the company in the 2024 financial year to -1%, roughly 270 basis points behind the wider City consensus.
"We believe major hyperscalers such as Google, Amazon, Microsoft and Meta are reallocating opex into AI-driven capex," the investment bank said in the note on Wednesday.
For example, it pointed to Microsoft expecting capex to increase sequentially each quarter through the 2024 year driven by cloud and AI infrastructure spending and has cut sales and marketing intensity by 90bps in the year to date.
Weaker demand is also apparent, with a slowdown in topline growth likely leading to weaker marketing spend, especially for hardware players and technology consultancies, with Dell cited as an example and a key WPP client, expected to post 11% revenue declines this year.
The tech trend exacerbates WPP's challenges as it has high exposure to technology, media and telecommunications (TMT) clients, making up 26% of its revenue.
This contrasts with competitor Publicis, who has just 13% exposure to the same sector.
"For WPP we expect shares will be driven less by organic growth momentum and instead by the delivery of cost savings and FCF improvement," UBS said.
However, as WPP shares trade for 7.2 times forecast earnings, the Swiss bank said it believes the shares "can still re-rate should the company deliver on medium term savings targets, even if organic growth remains weak".
But UBS's preference is for Publicis due to its lower exposure to TMT clients and strong contract winning momentum which is expected to persist next year.