Online-advertising businesses were hit hard early in the pandemic—and that includes the massive networks run by
Google. As the rest of the big tech stocks soared in 2020, the ad-focused giants were left behind. No longer.
This past week’s wave of tech earnings confirmed that Facebook (ticker: FB) and Alphabet (GOOGL) are doing just fine, largely because digital advertisers have returned to their prepandemic habits.
“I think we were a lot closer to normal in the fourth quarter,” says Baird analyst Colin Sebastian. “And then they put the foot to the pedal in the first quarter.” According to Sebastian’s estimates, digital spending in the U.S. will grow 26% this year, to $191 billion.
Most of those dollars will go to Google and Facebook, according to Sebastian’s team. Facebook will get 27% of the U.S. market this year, while Google will capture 44%. Everyone else is left fighting for the scraps.
On Tuesday, Alphabet’s first-quarter results easily beat Wall Street’s estimates. The company reported a per share net profit of $26.29 on revenue of $55.3 billion. Analysts had expected earnings of $15.64 a share and revenue of $51.7 billion. Shares jumped nearly 3% on the news.
Google’s YouTube is a significant part of that valuation. YouTube alone generated $6 billion worth of advertising in the quarter. Dollars that once bought broadcast and cable ads are now seeking new digital avenues to reach consumers. YouTube knows how to find the right ones.
Ad rival Facebook also smashed expectations, nearly doubling its profit to $9.5 billion, or $3.30 a share, and growing revenue 48%, to $26.2 billion. Both numbers surpassed Street forecasts. Facebook shares jumped 7.3% on its earnings news. Facebook’s quarterly report card also demonstrated the rebound in the advertising market. The company said pricing for its advertising was up 30% from a year ago, driven by a big boost in demand.
The guidance from Facebook Chief Financial Officer David Wehner suggested that long-feared changes to ad-tracking on Apple iPhones would probably have a muted effect on the business.
Alphabet and Facebook will continue to win and lose alongside the digital advertising market. As the economy reopens, that’s a good place to be.
For investors, Facebook remains the cheaper way to play the trend. Alphabet fetches 27 times earnings estimates for the next 12 months, while Facebook trades at 24 times.
Investors have begun to give Facebook more credit since Barron’s wrote a bullish cover story on the company in early April. Shares are up 9% since then. But the stock still looks relatively cheap.
Both Facebook and Alphabet, it’s worth noting, look cheap on a price/earnings basis compared with the lofty multiples of
(MSFT). Despite big earnings beats for those companies this past week, their stocks had muted, or even negative, reactions. (For more on tech’s big week of earnings, see Tech Trader)
Meanwhile, Facebook will continue to deal with its share of controversy, as we noted in our cover story, but the business continues to show resilience.
“The social impact and the potential of regulation has not been impacting the business side of it yet,” says Michael Cuggino, portfolio manager of the Permanent Portfolio family of funds and a longtime holder of Facebook stock. “The business side of it still has more potential avenues of monetization. There is a lot of potential going forward.”
Write to Max A. Cherney at email@example.com