Think a Recession Can’t Hurt Internet Stocks? Think Again

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Internet stocks certainly haven’t been immune to the sell-off caused by coronavirus-driven recession fears and there’s historical precedent to that reality.

Internet stocks, issued by companies who have led tech innovation in the 2000’s, have been one of the leaders of the bull market that ended Thursday.

As of Thursday’s sell-off, Facebook  (FB) - Get Report shares have risen 345% since its May 2012 initial public offering. The S&P 500 has risen 91%. Google  (GOOGL) - Get Report shares, since March 2009, are up 570%, beating the S&P 500’s gain of 224%.

And while many have expected a slowing innovation curve to be the catalyst behind the end of the tech-led market rally, Facebook has proven its new Instagram platform is a new growth driver. Google needs a new growth driver, but Apple  (APPL)  is getting in on internet services, enabling its stock to roar to an all-time-high of $324, before the coronavirus caused it to plummet to $254.

This newsletter can go on and on. And of course potential regulation from a Democratic president looms as a potential threat.

But the point is that a recession can indeed take the mighty internet stocks down. Whether those stocks will outperform in the face of a bear market -- which we’re now in -- or underperform remains to be seen. But these stocks won’t simply power ahead with unbridled investor enthusiasm.

Advertising spend will be hit by a recession.

The coronavirus is causing consumers to stay home and not shop. That hurts consumer retail, restaurants, airlines, and it helps consumer staples marginally, at least for a quarter or two. Manufacturers stop producing because workers stay home. Industrials, oil etc. take a hit. Investors flee stocks for bonds. Yields fall and so do bank stocks.

So how do internet companies get hit?

First off, " slowing advertising trends are a good predictor of economic weakness as businesses slash ad spending while sales slow,” wrote Moffett Nathanson Founder and analyst Michael Nathanson in a note.

All stocks have been sold off in this health crisis, as risk-off sentiment is everywhere. Facebook, Google, Twitter  (TWTR) - Get Report, Amazon  (AMZN) - Get Report, Disney  (Disney)  (which has internet streaming exposure) and Comcast  (CMCSA) - Get Report(which has the same), are all down for the year 23%, 15%, 13%, 8%, 36% and 21%, respectively. The S&P 500 is down 21% year-to-date, so some internet stocks have outperformed and some haven’t. It’s all over the place — a mess. Some might say Amazon would get hit as their delivery people might stay home, although that hasn’t shown up in any checks yet.

Here’s the bigger point. Nathanson’s research shows that, in the 2001 recession, global advertising spend fell 7% year-over-year. In the 2009 recession, ad spend fell 20%.

Some may also expect the internet stocks most exposed to advertising to see the largest earnings estimate revisions. Facebook and Google get 99% and 82% of their revenue streams from ads. Snap, down 36% year-to-date, sees all of its revenue from advertising. 

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