How Equity Analysts Are Assessing COVID-19’s Impact On Media And Marketing Sector

Monday’s Coronavirus (COVID-19) related market crash was the worst in the United States and the United Kingdom since 2008.

Given the spiraling situation, what will be the impact on the media and marketing sector? The performance of individual stocks and the guidance from equity analysts offer some early clues.

Ad-based companies are often the first to be downgraded during times of financial uncertainty, but Monday’s crash didn’t universally punish advertising-reliant stocks. Pinterest and Snapchat shares fared worse than the market as a whole with declines of about 12% each, as did The Trade Desk with a loss of 14 points. Holding companies WPP, Omnicom and IPG also did worse than the market as a whole with declines of 10% or more (Publicis did slightly better). Yet Google and Facebook each only fell by around 6% (a stunning $80 billion loss of market cap but on par or better than the market as a whole).

“Companies with recurring SaaS revenue will be better positioned to withstand market hiccups and dislocation,” said Elgin Thompson, managing director of technology investments for JMP Securities. “On the opposite end of the spectrum, discretionary media spend is very much at risk.”

The China case study

The immediate hit on travel and entertainment sectors are likely just the beginning, said GroupM global president of business intelligence Brian Wieser. China reprsents the only market with real financial data available, since COVID-19 started spreading in there in January and the country is closer than other nations to resuming normal work and consumer routines.

Wieser noted the largest public Chinese media companies, Alibaba, Weibo and Baidu, have priced in 20-30% drop-offs in media revenue for this quarter during their earnings reports in February, he said.

Vertical pain points

The impact on advertising is heavily skewed by industry. The travel industry bears the brunt, with media and events businesses taking losses as major live events – SXSW, new Pixar and Bond film releases and maybe even the Olympics – are called off or postponed.

The travel industry was forecasted to spend 10% of overall ad revenue this year, said Needham senior analyst Laura Martin. Seventy percent of travel advertising budgets are online and about 70% of that goes to search, she said. Those budgets have all but evaporated this month.

Google can absorb losses in search advertising related to travel, Martin said. And as long as the COVID-19 virus is contained by July, overall consumer and ad spending in the second half of the year is expected to return to normal.

“That’s optimistic, because we obviously don’t have visibility, but we’re assuming there’s a V-shaped recovery that snaps back when people are healthy,” she said.

Supply chain slowdowns would hit hard

The nightmare scenario is that global manufacturing shortages and COVID-19 cases extend far enough into the summer to upset holiday supply chain production, Martin said.

It could take months to manufacture products for stores – and if Apple, Nintendo and whatever other popular manufacturers don’t have supplies ready for Christmas, that could extend the current losses in the travel category – 10% of global advertising – to the holiday period when brands across the board spend about 40% of annual ad budgets.

Those concerns were on display at the Morgan Stanley Tech, Media And Telecom Conference in San Francisco last week. Snap CEO Evan Spiegel told investors that the company is optimistic that the impacts on its in-app ad business will be short-term and limited to certain markets. Roku makes most of its revenue from advertising, but CFO Steve Louden said his main concern is potential supply chain disruption.

Louden said the first few months of the year are important for restocking inventory after the holidays. Ad budgets may soften travel and entertainment brands pull back, but that’s a minor issue compared to having Roku devices ready in time for the shopping season this year.

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