Why Facebook’s ad business is doing better than Google’s during the pandemic so far

Facebook’s CEO Mark Zuckerberg speaks during the F8 Facebook Developers conference on April 30, 2019 in San Jose, California.

Justin Sullivan | Getty Images

Though the tech giants have proven to be relatively resilient to the worst of the pandemic’s impact on the advertising industry, it still stung: Facebook still saw the slowest revenue growth since its 2012 IPO and Google reported its first revenue decline in company history. 

But analysts said factors like the amount of revenue coming from direct-response versus brand advertising, exposure to areas like travel and Google’s sheer size gave Facebook’s ad business a leg up over Google during the second quarter.

In notes to investors on Thursday and Friday, analysts explained why Facebook is enduring the pandemic better than Google. Here’s what they had to say.

Brand advertising vs. direct response 

While direct-response advertising refers to placements that encourage a more immediate action, like downloading an app or clicking a link, brand advertisements are a longer-term play. They’re more focused on attributes like what a brand stands for or how it makes a consumer feel. During the pandemic, direct-response advertising has been strong, but spend on brand campaigns has been negatively impacted. 

Morgan Stanley analysts said Friday that Facebook’s ad revenue growth speaks to how Facebook is driving and benefiting from the “surging direct-response [and] e-commerce ad environment.” (During last quarter’s earnings call, Facebook chief financial officer Dave Wehner said the company hadn’t given a specific number on how much of its advertising business is direct response but said the category drives its business.”)

“FB’s DR-heavy advertising business and push capabilities continue to supplement hard hit verticals (e.g., Travel) with growing ones (e.g. gaming, app installs, ecommerce) [helping] it maintain growth so far through the challenging period,” Bernstein analysts said in an investor note on Friday.

It’s a different story at Google’s YouTube, where Bernstein analysts estimated 80% of revenue came from brand advertising. Bernstein analysts estimated that, given weakness in brand advertising, YouTube will continue to face “strong headwinds in the coming quarters.”

“Given what we’ve consistently heard about the divergent trends between direct response and brand across the digital ad ecosystem, our takeaway is that YouTube is probably a bit more brand exposed than we thought,” Evercore analysts said on Friday. “This makes underwriting the shape of near-term recovery at YT harder.” 

Search and sectors like travel

Analysts had been bracing for a lag in search this quarter, with Google “over-indexed to hard-hit verticals,” like travel, according to Bernstein analysts. 

“Search revenue was down by -10% Y/Y to $21.3B as it continued to reel under the pressure of declining revenue from some of its key verticals like travel and auto which together account for ~20% of Search revenue,” Bernstein analysts said. “However, Search appears to be on the steady path to recovery – management pointed to a steady improvement throughout the quarter with June ending flat Y/Y and a modest improvement in July.”

Google relies on travel as a big revenue driver, and that sector has cratered due to the pandemic. Expedia Group, for instance, said earlier this year that it was one of Google’s biggest advertisers. The company later said it would be drastically reducing its ad spend this year. 

Morgan Stanley analysts said Google’s exposure to travel advertising is three to four times the size of Facebook’s. 

“…The trajectory of recovery through the balance of the year is likely heavily dependent on a return of travel ad demand,” Evercore analysts wrote. 

Sheer size 

Analysts from Morgan Stanley and Evercore agreed it’s the sheer size of Google’s business that’s driving a slower ad recovery. Google’s ad revenue is nearly twice the size of Facebook’s.

Evercore analysts said for years they’d heard the argument that search advertising was “far more defensible than social” advertising and that the last two quarters “go a very long way in disproving that thesis.” In other words, Facebook was better positioned for the pandemic than Google, at least in terms of generating ad revenue.

“At the risk of over simplifying things, GOOGL’s market cap is ~50% larger than FB’s as of tonight’s close,” they wrote. “In the 2Q, FB delivered operating income of $6bn while growing revenue at 10% vs GOOGL’s $6.4bn on revenue growth of 0%. Of course, there’s nuance to consider, and yes, the nature of the current macro is unusual to say the least, but if ever there’s been a straight forward argument for market cap appreciation that feels like a pretty good one.” 

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *