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I’ve been wanting to add an advertising holding to my portfolio for a while now but I haven’t found the share that makes me want to press the ‘buy’ button. Would FTSE 100 constituent WPP (LSE: WPP) fit the bill? Perhaps Sir Martin Sorrell’s new charge, S4 Capital (LSE: SFOR), would be a better bet? Let’s take a look at the case for each.

A FTSE 100 elephant that isn’t galloping

When Sorrell left WPP, the company had a market valuation of over £16bn. In the last two years, the share price has steadily declined and its market valuation has more the halved. Despite a recent mini revival, its share price still sits more than 40% off its year high, hovering around the 600p mark.

While advertising spending globally took a huge hit with the outbreak of the coronavirus, WPP has had problems for much longer. Current CEO Mark Read inherited a complex conglomerate of hundreds of overlapping businesses and offices and has since set about streamlining and simplifying the company, raising billions in asset disposals in the process.

Most notably WPP sold a 60% stake in its data insights company Kantar to Bain Capital Private Equity in 2019. The proceeds were meant to fund a share buyback programme, but that was suspended along with its final dividend earlier this year as the company bunkered down to weather the coronavirus storm.

To me, Read appears to be doing the rights things by transitioning this FTSE 100 elephant towards digital marketing and advertising. But this is a glacially slow process, and in the meantime, a more nimble competitor is stealing a march.

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The new kid on the block

Sorrell wasted no time setting up S4 Capital Plc in May 2018 with a focus on technology-led, digital advertising. Digital is the largest growth area within advertising and marketing. S4 estimates that digital spending accounted for roughly 47% in 2019 and forecasts this will rise to just under 60% by 2022.

S4 has grown through a number of acquisitions, most notably MediaMonks, the group’s digital content practice that makes up 79% of gross profit, and MightyHive, its programmatic and data analytics hub that forms the remaining 21% of gross profit. With a market cap of $1.5bn, S4 is a fraction of its FTSE 100 competitor, but it is growing fast.

As you would expect with such acquisition-led growth, revenue has skyrocketed. It nearly quadrupled in 2019 from £55m to £215m. The company has a strong cash flow and balance sheet and operates with no net debt. While certainly not in a recession-proof industry, there has been seemingly little impact year-to-date, with S4 reporting like-for-like revenue and gross profit increases in its May update.

But such success has not gone unnoticed and the company trades on an eye-watering price-to-earnings ratio pushing 60. The share price has also been on a charge, recently topping 300p after falling sharply in March.   

So where would I invest my money? Well, I see value in FTSE 100 goliath WPP, but I don’t see the long-term growth story. I’d be much more inclined to invest in S4 Capital. However, I’d want to see its share price and P/E ratio ease back before I dust off my buy button.

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The post FTSE 100 stalwart has a new challenger in town appeared first on The Motley Fool UK.

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David Barnes has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020