Google’s parent company, Alphabet, and Facebook this week are expected to confirm what is likely to be a huge slowdown in their businesses, a result of the coronavirus pandemic.
Advertisers have slashed their spending, giving the two tech giants a harsh dose of the new reality. Investors will see the actual damage when Alphabet reports its earnings on Tuesday, followed by Facebook on Wednesday.
The effects of declining ad spending began midway through the first quarter, as several countries in Asia, followed by Europe and then the U.S., implemented stay-at-home orders. Analysts expect the full force of the pullback to hit during the second quarter.
“This is really the first major economic dislocation they’ve been through” since the financial meltdown in 2008, said Colin Sebastian, an analyst with investment bank Baird. And the current crisis came on more swiftly, he added.
The subdued expectations are a major shift for the two companies, which for the past decade have dramatically grown their digital ad businesses. Both Alphabet and Facebook are the biggest recipients of digital ad dollars.
Baird predicts Alphabet will report $33.8 billion in first-quarter revenue excluding the payments it makes to publishers, up 15% from last year versus up 19% in the year-ago quarter. For the second quarter, the investment bank expects revenue growth by the same basis to slow even more, to 1%, compared to 21% in the year-ago quarter.
As for Facebook, Baird says first-quarter revenue will actually grow 16% to $17.5 billion, although that’s far slower than a year earlier, during which revenue grew 26%. In the second quarter, it said, Facebook’s sales will increase 5%, versus a 28% gain in the year-ago quarter.
Alphabet will feel greater pain than Facebook because of the large number of travel industry ads it usually sells, coupled with its dependence on small and medium-size businesses. Baird expects some airlines and hotels to almost entirely eliminate their online ad budgets.
Overall, online ad spending for all marketers is expected to tumble 15% to 20% in March compared to February, according to data marketing software company Zeta Global.
Despite the slowdown, Alphabet and Google are more insulated from the decline than most ad-dependent companies. Marketers that are active during the pandemic are tending to stick with Google and Facebook because of their huge reach and strong ad-targeting capabilities, Zeta Global said.
Analysts at research firm MoffettNathanson say while they expect smaller companies like Twitter and Snap, whose financial results beat analysts’ lowered first-quarter expectations last week, to suffer the most as marketers cut their budgets, Facebook and Google “are not immune.”
Last month, Facebook warned that it was seeing a “weakening” in its ad business as a result of the pandemic. And Alphabet CEO Sundar Pichai sent a memo to employees last week saying that Google would slow hiring for the rest of the year, a result of the financial strain.
Facebook has said while its ad business is slowing, people are using its products more than ever. Meanwhile, analysts suspect that Google Cloud, which allows Google customers to store their data and access it over the Internet, is also gaining traction as more companies adjust to operating in an environment in which a lot of work must be done remotely.
Undoubtedly, investors will closely dissect Google and Facebook’s earnings to gauge the health of the overall digital ad industry.
“Because of its large share of the U.S. and worldwide digital advertising markets, Alphabet’s earnings report will give clues as to what to expect for the broader digital ad market in Q2 and through the rest of the year,” Nicole Perrin, analyst for eMarketer, wrote in a recent note.
Analysts expect digital ad spending to slowly return later this year and into next year, assuming there isn’t a second wave of the coronavirus or a prolonged recession. The fourth quarter, which is usually big for advertisers and e-commerce because of the holidays, will be the true “test” on whether consumers are ready to spend money again, said Baird analyst Sebastian.
“To get back to where we were, it’ll be less likely to happen in 2020 and more likely to happen in 2021,” he said.
Correction: An earlier version of this article mischaracterized what investment bank Baird had predicted about Alphabet’s financial performance. The article has been updated to provide accurate numbers.
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