The coronavirus pandemic is destroying advertising budgets, but you wouldn’t know it to look at the two titans of the digital ad industry, Facebook (FB) - Get Report and Alphabet (GOOGL) - Get Report. Both companies’ stocks are up about 5% in the last week of trading, with Facebook up 13% so far this week while Alphabet shares are up 11%.
More significantly, neither has seen estimates change very much in the month during which the entire world seems to have changed, including advertising. Estimates from analysts who are among the longest followers of their businesses suggest revenue this year for both companies could end up being far lower than currently expected.
Both Facebook and Google make the vast majority of their revenue from advertising, a business that is heading toward what looks like a crisis as the result of COVID-19 lockdowns whose economic effect has yet to be fully felt.
Airlines are carrying fractions of the load they used to, people can’t stay in resorts and dining out is way down, which means whole swaths of lifestyle brand advertising have no function in the present economy.
Things are going to get worse before they get better. The biggest advertising agencies in the world have signaled that their business is being hit, but they don’t know how badly yet. WPP (WPP) - Get Report on March 31 withdrew its financial forecast for the year. The company said “we have seen an increasing volume of cancellations” from its clients globally.
Similarly, ad giant Omnicom Group (OMC) - Get Report remarked on March 25 that it can’t predict “the impact of COVID-19 on our operations and liquidity, and depending on the magnitude and duration of the COVID-19 pandemic, such impact may be material.” When a company is talking about cash flow issues, you know they are contemplating something serious.
Bear in mind, these are not just old print, TV and outdoor advertising agencies, but two of the largest digital ad buyers in the world. So-called "CRM" revenue, which equates to digital advertising, made up over a quarter of Omnicom's 2019 revenue. And WPP owns what it considers to be one of the world's largest digital advertising networks, called GroupM, which does $20 billion of digital ad buying annually.
Market researchers are also signaling trouble: The Internet Advertising Bureau on March 27 projected that "in the near term, digital ad spend is down 33% and traditional media is down 39%." And that's likely before the IAB really has a full handle on the impact to the industry of a global shutdown that is still evolving.
The most positive signs from the online advertising world, moreover, are fairly mixed. Image-sharing site Pinterest (PINS) - Get Report, which gets all its revenue from advertising, announced quarterly results Tuesday evening that topped expectations, sending its shares up almost 12% on Wednesday. But it also yanked its outlook for the rest of the year.
In an environment such as this, it is striking that estimates for Facebook and Alphabet’s Google have yet to change much in the past 30 days. The average estimate on FactSet for Facebook’s revenue for this year stands at $80.7 billion. That is down about $5 billion from what it was at the end of February, when no one had any idea COVID-19 was something that could impact global advertising.
That means that most on Wall Street expect perhaps a 6% hit to Facebook’s revenue from what could be a collapse of the advertising industry or at least of a good chunk of it. That doesn’t sound logical, and in fact it sounds way too low. It still leaves Facebook with 14% revenue growth, which, while down from almost 27% growth in 2019, would be pretty fantastic amidst what the World Trade Organization is saying could be a drop of 9% in global gross domestic product this year -- a situation that is “ugly,” the worst since the Great Depression, the organization said Wednesday.
Numbers for Google seem similarly unrealistic. Since the end of February, the FactSet average estimate for the company’s revenue this year has dropped by $10 billion to $181 billion, roughly the same 5% change as for Facebook. That means Alphabet is still expected to see revenue rise by 12% this year -- again, way down from 18% growth in 2019, but still decent double-digit growth.
A far more drastic scenario is offered for these companies from Goldman Sachs’s Heather Bellini in a note to clients put out on March 26. Bellini is modeling $68.5 billion in revenue this year for Facebook, versus that consensus $80.7 billion, or 15% less than the Street expects. That would be a decline in Facebook's revenue year-over-year of 3%. Similarly, for Alphabet, Bellini models Alphabet bringing in just $164 billion versus the consensus $181 billion, or 9% less. That means just 1% growth for Alphabet this year.
Bellini expects “engagement” will be up at Facebook, leading to a higher average daily user count, as people try to connect. But she also expects ad revenue per user to fall by as much as 38% by the fourth quarter of this year. “We note that ad budgets are highly correlated to overall GDP growth,” writes Bellini, “and we see significant impact on ad pricing for those that are advertising on the platform.” For Google, ad revenue may decline by 13% in Q4, “as ad spending in end-markets such as Media & Entertainment, Retail and Travel come under significant pressure, just to name a few.”
Analysts are waiting for the next quarterly report from Facebook and Alphabet before they tweak their numbers. Facebook will report April 22 and Alphabet on April 27. Having barely moved recently, the estimates changes will be deep. A bright scenario would be if all the pain comes with the next round of revisions.
Given how fast things are still evolving, however, it may only be the beginning of vastly lower expectations for both companies.