WPP PLC

WPP delivered better than expected first-half results, with like-for-like net sales down 4.7%, ahead of management’s guidance, while cost cuts lifted headline operating margin to 8.4%. Stronger net new business wins improve the setup for 2027, but underlying revenue trends remain weak.

Why it matters: WPP is showing early signs of stabilization but little evidence yet that its competitive position has materially improved. Recent wins could support a return to growth in 2027, though the company continues to materially lag a healthy advertising market. WPP has recently improved its net new-business performance with wins including Estée Lauder, JLR, Airbnb, and Honda. While encouraging, Omnicom has described the current new-business environment to be “as brutal as it’s ever been” and acknowledged competitive pricing in recent pitch losses, raising the likelihood that WPP’s wins come at weaker economics. Cost savings are cushioning profitability but cannot drive a durable turnaround alone. With second-half investment increasing, longer-term margin expansion increasingly depends on restoring revenue growth and improving operating leverage.

The bottom line: We maintain our no-moat rating and fair value estimate of GBX 308 for WPP. Shares were up nearly 30% after earnings on improving net new business momentum and sequential organic trends. We think the reaction runs ahead of the fundamentals and need to see recent wins translate into sustained growth and stronger profitability before revisiting our valuation. Current results still reflect prior client losses, while forward indicators have only recently improved. With management not expecting a return to growth until 2027, the turnaround remains early.

We recently spoke with consumers across Western Europe, and almost all respondents expressed negative sentiment about their capacity to consume and travel amid price pressures—a negative look-through given WPP’s heavy European exposure.

Our quantitative analysis shows that regional growth in Europe (and the United Kingdom) has a more statistically significant impact on agencies’ organic growth than in North America. While our macroeconomic quantitative work is only a component of a broader valuation exercise, WPP’s high exposure to European economies (mid-30s percent of revenue versus the peer average of mid-20s) and expectations of a slowdown in the European region (Strait of Hormuz oil shocks, lack of domestic energy) create a stronger relative headwind for WPP.

Our $23.40 per share fair value estimate implies an enterprise value of 3.8 times our 2026 adjusted EBITDA estimate. We use a $1.34/GBP 1 currency conversion rate and account for the proper ADR/ordinary share exchange rate.

The main drivers of WPP’s revenue are region-specific economic growth, client wins and losses, and the ongoing shift toward digital advertising. Our overall revenue forecast is based on an analysis of historical organic growth by region and economic growth by region. We then overlay our understanding of other drivers in the advertising space, like the growth of digital media and the emergence of AI-generated ads.

For WPP, we lack confidence that InfoSum’s federated learning strategy will improve client wins over the long term, given that brands have viable competitor options that come with a robust identity graph. In an increasingly complex omnichannel environment with a multitude of self-service tools, we believe brands will be attracted to agencies that possess the most robust datasets and identity graphs. This isn’t WPP. This perspective translates to a forecast of a 0.5% average annual sales decline over the next five years.

The largest cost line item for WPP is the cost of services, which encompasses staffing expenses and media pass-through costs, which are fees paid to external vendors (such as human production) and charged back to the client. This line item has averaged approximately 84% of revenue over the past two years, and we project it will gradually rise to 85% through 2035. An influx of AI production tools could compress wages for freelancers and directors, as well as some creative production roles, but we believe that WPP will still have to pay up for the best technological and creative talent, and that human costs have the potential to become compute-reselling costs.

WPP, along with the other agencies, persistently runs a negative working capital balance, which provides a cash inflow. The negative working capital balance is a result of agencies not holding inventory or many hard assets, collecting revenue upfront (low accounts receivable), and delaying payment to third-party vendors due to their considerable bargaining power, derived from control over advertising budgets. We expect this negative working capital balance to be maintained throughout our projection period.

We do not believe WPP has a moat, primarily because of its relative weakness in customer identification and targeting.

The advertising landscape has become increasingly fragmented as new technologies and media formats have emerged. The rise of search and social media advertising has created a more widely distributed audience that allocates time across various channels. This fragmented advertising landscape can overwhelm individual brands, but it also creates fertile ground for agencies to use historical campaign performance data in conjunction with brand data to inform strategy. Armed with valuable insights into which advertising strategies are most effective, agencies act as strategic integrators across various channels and geographies in a manner that is not easily replicable.

Since the advent of digital media, a variety of players have emerged to serve different functions throughout an increasingly complex advertising supply chain. They range from the specialized tech players like The Trade Desk, which programmatically buy advertising space, to the major digital ad platforms, like Google and Meta, that display content but also own the “buying” demand-side platform, the advertising inventory on the supply side, and the intermediating advertising exchange in between.

Agencies like WPP create value by navigating this complex landscape and taking responsibility for creative development, brand management, and media buying decisions across the entire ad supply chain. With agencies, brands have an unbiased arbiter with significant know-how and decades of benchmarking data to inform diverse strategies. With attention spread across many platforms, audience targeting and the ability to quickly adjust campaign strategy have become increasingly important. It would be incredibly difficult for even a global company’s marketing department to navigate this fragmented environment optimally, considering the multitude of variables, like where to buy, when to buy, and when to adjust messaging.

Additionally, incentives are misaligned between players in the advertising supply chain and customer brands, as nonagency players like Google, Meta, and Amazon are incentivized to maximize profitability rather than prioritize advertisers' success. As seen in the recent Google antitrust case, nonagencies can operate in anticompetitive ways. This conflict of interest generally does not exist between agencies and brands. WPP is looking to maximize clients’ return on ad spending so it continues to win mandates.

Along with the data that underpins these agencies’ intangible assets, we believe that the brand reputations of the largest, most scaled agencies lead to durable competitive advantages. The high cost of pitching and the premier role of advertising decisions in driving top-line growth lead brands to primarily engage with large agencies, since they have reputations for running historically successful campaigns for the world’s largest companies. These agencies can also spread the high cost of a pitch across a large client base, reinforcing their dominance in high-stakes pitches.

We are skeptical that switching costs remain an advantage for agencies, given the prevalence of high-profile brands switching from one agency to another amid intense competition between top creative departments and media buying teams. However, premier brands usually only switch between the largest agencies, electing to avoid both in-housing to an internal marketing department or going off the radar with a smaller boutique agency, which again reinforces the idea of intangibles being tied to an agency’s brand strength and that brand strength tends to guarantee a spot at the table in all major pitches.

We believe the strongest argument for switching costs exists in Publicis’ Epsilon data segment, as it is the most sophisticated persistent identity graphing technology. Epsilon facilitates the most effective targeted marketing among the agencies, which, in turn, boosts Publicis-led campaign effectiveness. On the other hand, Acxiom, a rival identity-graphing system now part of Omnicom, has struggled to differentiate itself as an attractive targeting solution.

There is room to make an argument for indirect network effects, since the agency offering should theoretically improve as more brands advertise with the agencies. An increasing number of campaigns allows the agencies to collect more data, and the additional data can be used to optimize future campaigns. There is a positive feedback loop that can strengthen an agency’s performance, but we do not believe the indirect network effects are durable. However, several large players have competed with one another for decades, with major changes in market share typically only coming via acquisitions. If network effects are present, they remain relatively small and don’t accrue to a degree that allows one firm to differentiate.

WPP recently rolled out WPP Open, an operating system that integrates creative and media buying offerings. This solution should placate the growing number of clients who prefer simplified yet quantitative campaign management and full-funnel attribution.

The acquisition of InfoSum should facilitate the creation of ad optimization models on a company-by-company basis, using clients’ first-party consumer data.

WPP is one of the largest media buyers in the world, which provides advantageous ad inventory prices that can be passed along to clients in order to win business.

WPP's revenue is declining while its largest peers are growing nicely amid strong advertising demand. This weakness shows its organizational simplification pursuit has yet to pay off.

WPP's investment in WPP Open Pro, a self-service model for small and midsize businesses, may struggle to attract customers away from rivals like Google, which powers the actual model and also has advertising ecosystems to monetize.

WPP lacks a proprietary dataset with the same breadth as competitors' offerings, including Epsilon and Acxiom, limiting equivalent deterministic ad targeting.