When the world's two largest social media companies – Alphabet (NASDAQ 🙂 and Facebook (NASDAQ 🙂 release their first quarter 2020 earnings reports on Tuesday and Wednesday of this week respectively – investors will focus on how the pandemic of COVID-19 impairs their critical revenue streams for digital advertising.
For many analysts, it is difficult to quantify the impact of an upcoming global recession on social media companies. After all, each is a relatively young company that is the product of the unprecedented economic growth of the past decade. That growth set the stage for the longest bull run in the history of the US stock market, powered by top tech companies including Facebook and Google's mom Alphabet.
Video, Speech, SMS Explosion That's Hard to Cash Out
Facebook reports its first quarter profit after the market closed on Wednesday, April 29. Analysts expect an average of $ 1.74 per share on revenues of $ 17.4 billion.
FB Weekly TTM
But the most important detail that will set the price for its already damaged stock price – the stock has lost about 15% of its value since the beginning of the year – is how the social media giant sees the future when so many small and large companies are standing Under pressure and cut down on their ad spend.
Needham analyst Laura Martin said in a recent comment that 30% to 45% of Facebook's global revenues come from ad categories that are considered "risk" by COVID-19. In addition, said Martin, six of the top ten countries where advertising is currently spreading are hot spots for the coronavirus.
"Our channel checks indicate lower spending on travel, retail, packaged consumer goods and entertainment, which together account for 30% -45% of Facebook," Martin wrote in a note to customers. "As consumer demand has declined, ad forecasts have started to decline," she said.
For its part, Facebook has already informed investors of both the positive and negative implications of the pandemic for its business. While the Menlo Park, CA-based company sees an explosion of messages, voice and video calling on Messenger and WhatsApp during corona virus locks, it's hard for the company to capitalize on all of these opportunities.
"We do not monetize many of the services for which we see greater involvement, and we have seen a weakening in our advertising activities in countries taking aggressive actions to reduce the spread of COVID-19," wrote Alex Schultz, VP of Analytics, and Jay Parikh, VP of Engineering in late March.
Significantly Slowing Hiring
For Alphabet, the parent company of search engine giant Google, the story is not much different from that of Facebook. The company will report its first quarter 2020 fiscal profit tomorrow, Tuesday, April 28, after the market closes. Expectations are average for earnings per share of $ 10.70 on revenues of $ 41 billion.
BiederL Weekly TTM
The internet giant's business model relies heavily on ad spend from businesses and small businesses. And these markets will be in big trouble in the near future.
According to RBC Capital Markets, online advertising revenues in the current quarter will decline approximately 30% from a year earlier, as business in the travel, auto, hospitality, and retail sectors has stalled.
Alphabet CEO Sundar Pichai told employees in an email last week that the company plans to "significantly slow down" its hiring pace for the rest of this year because the Mountaniview, CA-based company is not immune may continue for global economic disruption, according to Bloomberg News. Ads on Google Search and other ads last year accounted for 61% of sales – much of the corporate pie that could be seen in the current environment.
For these reasons, Google stocks outperformed other major tech stocks in the current recovery. On Friday the stock closed at $ 1,276.60, down 4% for the year. In the same period, Microsoft (NASDAQ :), which competes with Google in cloud computing, has risen 11%.
Bottom Line
Investors should not expect much clarity from these two giants on social media when reporting their earnings this week, especially when their main advertising revenue markets are in full turmoil and no one can predict how or when the virus will be contained. That means their shares will lag behind other tech giants, such as Netflix (NASDAQ 🙂 and Amazon (NASDAQ :), those who stay at home.
That said, this troubled period should give long-term investors the opportunity to take advantage of and buy shares from any company at low levels for both Facebook and Google. Their strong balance sheets and formidable market position will allow everyone to return strongly once the economy starts to recover.
