Enterprise within the age of COVID-19: Google is beneath strain from a weakening promoting market that has lowered gross sales expectations by greater than $ eight billion

This article is part of a series that tracks the impact of the COVID-19 pandemic on large companies. It will be updated. It was originally released on April 8th.

Alphabet Inc.'s dominance in online advertising has been severely compromised during the Corona virus outbreak, and it could be very bad if Google's parent company reports results on Thursday.

The slowdown in the advertising market in the early days of the pandemic hit all major players, including Alphabet
+ 1.40%
+ 1.21%
. "March saw a significant slowdown in advertising revenue," said Alphabet’s Chief Financial Officer Ruth Porat, during the first quarter earnings statement in late April.

This trend did not end at the beginning of the second quarter and may have bottomed out in the reporting period. This led Monness Crespi Hardt analyst Brian White to warn last week: “Alphabet will continue to struggle with weak digital advertising spending and antitrust investigations. ”Hardt is forecasting sales of $ 36.8 billion in the second quarter, a 6% decrease from the previous year and well below the $ 37.3 billion modeled by factSet analysts.

"With the COVID-19 crisis afflicting more parts of the US in the most shameful and unpredictable way, we believe companies will be less inclined to spend on advertising," White said in a July 24 announcement that a buy rating and a target price was maintained of $ 1,420.

Alphabet's core business, Google, accounts for approximately 28% of the global $ 332.84 billion digital advertising market and is expected to maintain that lead in 2021 and beyond, according to eMarketer. YouTube is an important reason for this – according to eMarketer, the video streaming website is expected to generate $ 8.42 billion in 2020 and $ 14.1 billion in 2022. At the end of April, Alphabet announced in the first quarter that it had $ 4 billion in YouTube ads and $ 2.78 billion in Google Cloud ads.

White and others remain optimistic about the long-term position of Google Cloud and Alphabet in a world that will become much more digital after this crisis.

"We believe the changes to Google Shopping announced on July 23 are in line with the company's more aggressive strategy of attracting retailers, product lists and consumers to Google's shopping app / tab," said Colin Sebastian, analyst at Baird, in a July 23 announcement that maintained an outperformance rating and price target of $ 1,650. "We believe that these" free "initiatives could attract more Search, YouTube, and Display spend over time."

Business in the COVID-19 era: read profiles about how other large corporations will be affected by the corona virus

Google has been here before when it wasn't called Alphabet. During the recession triggered by the subprime credit crunch a decade ago, sales remained in single digits for five consecutive quarters. According to an analysis by MKM Partners, Google's sales estimates decreased by at least 15% in 2009 and 2010, with profits slightly higher.

However, Google had the field to itself more than a decade before Facebook Inc.
+ 1.20%
, Snap Inc.
+ 3.11%
and Twitter Inc.
emerged as an online advertising competitor.

Since the last recession, Google has also diversified its business beyond search ads, with YouTube and Cloud accounting for more than 40% of incremental growth, MKM Partners reported.

How the numbers change

Revenue: Analysts' second-quarter expectations for the second quarter were $ 45.86 billion at the end of 2019, but decreased to $ 37.3 billion as of July 27. Estimates for Google sites, which account for the majority of Alphabet's revenue, decreased from $ 32.09 billion to $ 24.98 billion over the period, according to FactSet. For the full year, analysts expect sales of $ 169.7 billion.

Merits: The average expectations of FactSet analysts at the end of 2019 were $ 13.38 per share. As of July 27, they were $ 7.95 per share. For the full year, analysts expect earnings of $ 41.49 per share.

Warehouse movement: Class A shares improved 14% by Friday. Google peaked at $ 1,564.85 on July 19 and closed at $ 1,534.60 on July 27.

What the company says

July 27th: According to a report in the Wall Street Journal, Google tells employees that home orders will be extended to at least July 2021 due to the pandemic.

July 23: Google offers to bring more sellers and products to its shopping page by foregoing sales commissions and allowing retailers to use popular third-party payment and order management services such as Shopify Inc.
+ 5.01%
instead of the company's own systems. Google Shopping commissions range from 5% to 15% depending on the product.

April 28: Google's earnings were weighed down even more than expected as the COVID-19 pandemic caused "a significant slowdown in advertising revenue," parent company Alphabet said in a quarterly earnings report. "Performance was strong in the first two months of the quarter, but advertising revenue slowed significantly in March," said Alphabetical Chief Financial Officer Ruth Porat. "We are increasingly focusing on more efficient execution and continue to invest in our long-term opportunities."

April 23: Google has confirmed it will cut its marketing budget by half in the second half of the year and has hired full-time and contract workers to cut spending for the rest of the year.

See also: Google aims to reduce hiring and other expenses related to corona virus, says Alphabet's CEO

What analysts say

• "We expect Google’s search engine ad revenue to continue to decline in the second quarter, although we expect the second quarter to be the bottom of this market." We pay attention to every color they give, whether April was the low and spending in May and June declined somewhat. YouTube should continue to post double-digit growth throughout the second quarter (although this was still a downgrading of growth expectations ahead of COVID). Here we will look for additional comments on whether the mix of brand and direct response advertisers will change in favor of direct response advertisers – an area that Google wanted to grow this year. "- – eMarketer analyst Nicole Perrinon July 23.

• “Google can also be seen as a straggler with an apparently low bar for second quarter earnings. However, we expect that the P / E premium for FB (currently 2 rounds) will continue to decrease as growth premiums increase and FB will grow much faster. We believe Google will trade at a multiple higher than its most recent historical range. We believe that cartel risk will return as the economy recovers but will no longer be the focus of the upcoming elections. We believe that all digital platforms will benefit from behavior changes after COVID, and we expect opportunities for Google and other bets to accelerate. "- – Rob Sanderson, analyst at Loop Capital Markets, maintained its hold rating and target price of $ 1,500 on July 20.

• “In contrast to 2008 and the subsequent recovery, we do not see a decline in advertising expenditure in this cycle as a percentage of GDP, but a broad share. This is based on a more constructive view of performance-based advertising platforms like Facebook, Snapchat, YouTube and Amazon. "- – Morgan Stanley analyst Benjamin Swinburneto assess the digital advertising climate on July 20.

Related Articles