An objection that can legitimately be made to my reasoning is...

An objection that can legitimately be made to my reasoning is that it implies a natural decline of [Marketing spend]/Revenue over time, as long as all these organic growth drivers are in force; so, one could ask, why is it then that the ratio was at 13.6% in 1H22, i.e. higher than in any reporting period over the previous five years?

Beside the increased “brand marketing” (i.e. TV advertising and other similar initiatives), the main reason for that has been the sharply increased “cost per click” in the post-Covid period: while that is commonly described as Google using its pricing power to take advantage of the boom in online retail sales, the auction-driven nature of the ad pricing makes me think that the rise in cost was mainly the result of increased competition for ad space at a time of stimulus-driven excess liquidity. I personally expect this trend to revert, in the current environment of tightening financial conditions, so it seems reasonable to me to assume that the cost per click will at least not increase further from its current levels. That, in turn, should entail a natural decline of the [Marketing spend]/Revenue ratio all else being equal, i.e. before any proactive Management decisions on the matter, which is what I have incorporated in my modelling.

On the topic of current demand for online advertising, and how it is likely to affect [Marketing spend]/Revenue for businesses such as TPW, I find very relevant the following excerpt from Snap Inc’s (owners of Snapchat) Q2 Investor Letter:

“While we are excited about the progress we have made in terms of community growth and engagement, demand growth on our advertising platform has slowed significantly. The combination of macroeconomic headwinds, platform policy changes, and increased competition have limited the growth of campaign budgets. In some cases, advertisers have lowered their bids per action to reflect their current willingness to pay. For example,in some industries where top-line growth remains strong, but businesses are experiencing input cost pressure due to inflation, we have observed reduced marketing spending and lower bids per action. In certain high-growth sectors, businesses are reassessing investment levels amid the rising cost of capital, which is further reflected in campaign budgets and the level of bids per action.”

And, further, from Snap Inc’s Q2 earnings call Q&A session:

“We're seeing these various headwinds put pressure on the earnings of a wide variety of companies, and this is directly impacting the demand for advertising. Specifically, advertising spending, in particular, auction-driven direct response advertising is among the very few line items in a company's cost structure that they can reduce immediately in response to pressure on their top line or their input costs. As a result, as many industries and verticals have come under top line or input cost pressure, advertising spending has been amongst the first areas impacted.”

So, it would appear that advertising budgets are indeed getting slashed globally, especially by under-funded advertisers who are particularly sensitive to the rising cost of capital, and that is immediately resulting in lower bids for auction-driven ads.

Alphabet Inc’s results on Wednesday 27th will confirm to what extent Google Ads specifically are being affected; but, generally speaking and as a leading indicator, this confirms that the macro-economic factors that drove the sharp increase in Customer Acquisition Costs for online retailers over the past 12-18 months have now started to mean-revert. And that, as argued in my previous post quoted above, is very good news for self-funded e-commerce businesses like TPW.