Facebook, Twitter Revenue Warnings Point to a Sudden Pullback in Ad Spending

A recent analysis found that Facebook cost-per-click plummeted by 50% between December and March, indicating that coronavirus has thrown the digital ad market out balance.
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With large chunks of the U.S. economy grinding to a halt from coronavirus-related shelter-in-home orders, advertisers are pulling back spending on a range of ad platforms, recent evidence shows.

Following a similar announcement from Twitter  (TWTR) - Get Report, Facebook  (FB) - Get Report said on Tuesday that the pandemic has "adversely affected" its first quarter revenue, given a decline in advertising sales in countries hardest hit by the virus. 

Neither company issued a specific revision to their revenue projections, but recent data points to a sharp decline in demand for digital advertising. 

“Because of uncertainty about the economic environment, [brands] are slowing down investment,” said Yuval Ben-Itzhak, CEO of the social marketing platform Socialbakers. 

According to Socialbakers, which analyzed around 2.4 million Facebook posts between December and March, average cost-per-click in North America fell from 64 cents to 32 cents in that time frame. Other regions, such as Western Europe, saw a similar drop as the virus triggered business closures and stay-at-home orders. 

Even adjusting for seasonality, a drop of that magnitude is very unusual, Ben-Itzhak added.  

“With COVID-19, people are staying at home and have plenty of time to consume content; we’re even seeing that the times people are consuming digital content is spread across the day,” he said. “So the supply is significant, and in addition to that, budgets are being cut. That’s shifted the balance of the marketplace.”

Both Facebook and Twitter noted increases in usage of their services. Twitter said that its daily active user count is up 23% this quarter, while Facebook pointed to dramatic spikes in Facebook Messenger, WhatsApp, video calling, Instagram and Facebook Live. But both said that demand for ads has slumped. 

Socialbakers data from parts of Asia, where the virus has diminished, show a rebound in advertising as workplaces have begun to re-open. But in the near term, analysts are anticipating a hit to digital ad revenue across the board, including Facebook, Google  (GOOGL) - Get Report, and others.

In a recent report, RBC Capital Markets analysts noted that in 2009 -- the last major recessionary period -- Google’s advertising business decelerated as worldwide ad sales fell about 11% overall. And as a much larger company today, investors can expect a more pronounced deceleration if the economy slumps for an extended period. 

“Google’s brand advertising business will face pressure and its travel advertising segment (10-15% of total revenue) will endure significant pressure,” the RBC analysts wrote in the report published March 13.

Facebook is less reliant on travel-related advertising, and will be relatively resilient in the event of an economic downturn compared to other Internet stocks, according to RBC. But the bank also cut revenue estimates by roughly 5% for Facebook, noting that historically, ad budgets are quick to get slashed in recessionary periods. 

Facebook's announcement Tuesday seemed to align with that assumption, with the company noting "a weakening in our ads business in countries taking aggressive actions to reduce the spread of COVID-19." It also noted that the services where it's seen the greatest spikes in usage aren't yet well-monetized.