With almost two months of nationwide lockdowns under our belts and a round of quarterly earnings reports, Wall Street’s sentiment around digital media and ad tech companies is … surprisingly positive.
Companies that rely on advertising are supposed to be among the most prone to recessions and market panic, since advertising is historically tied to GDP and consumption. But during the COVID-19 crisis, many ad-based businesses have been star performers as the market rebounded from a crash in March.
Facebook had a “stunning” quarter, with revenue flat year over year in April despite nationwide lockdowns, said Pivotal Research analyst Michael Levine.
Flat revenue isn’t usually a positive, but investors at least are confident Facebook’s ad business will weather the crisis, and its market cap jumped by almost a fifth after the company reported earnings.
“It seems pretty ridiculous,” he said. “I mean in a good way. I’m impressed.”
Other big ad platforms like Google and Snapchat also beat analyst expectations, with user engagement up and a large enough cohort of advertisers to buoy revenue, Levine said.
Google is preparing for a much tougher Q2, CFO Ruth Porat told investors. But its profitability is only dented. Likewise, Snapchat’s ad growth dropped from 58% in January and February to 25% in March.
The situation, however, is “better than feared,” said BMO Capital Markets analyst Dan Salmon.
The biggest get bigger
Despite the anticipated difficulty of Q2, the major walled gardens stand to gain share, since smaller companies will struggle to make ends meet, Salmon said.
And look for those corporate giants with huge balance sheets to scoop up valuable businesses for a song.
For instance, Target picked up the same-day delivery technology of the startup Deliv in a “capitulation trade” earlier this month, said Elgin Thompson, JMP Securities’ managing director of technology investment banking.
Giphy, the meme library, agreed to a $400 million sale to Facebook last week – down from a $600 million valuation when it last raised money in 2016.
And on Tuesday, the mobile app analytics company Tune got snapped up by Constellation Software – which might not be a household name, but it brought in $3 billion in revenue in 2019.
Each of those was a venture capital-backed startup, until this month.
“We are hearing that VCs are handing the keys to entrepreneurs and wishing them luck as they walk away from financially supporting investments,” Thompson said. That’s a bad trend for startup entrepreneurs, but a good one for large, profitable businesses.
Internet tailwinds
The non-walled gardens saw decent share bounce-backs as well since March, though not always for the best reasons.
Criteo, for instance, is fairly profitable and its shares declined so much in the past couple of years that it’s now a value play, even as it anticipates a 10% revenue decline this year due to COVID-19. Criteo was one of two tech and internet stocks upgraded by BMO last quarter (the other was Alphabet) because its market cap dropped almost as low as its cash assets, Salmon said.
Other ad tech players such as Rubicon Project, Cardlytics and The Trade Desk have a better story to tell. They benefit from a wholesale shift in consumer and investor mindsets and investors are betting that those CPG brand dollars will stay online, not revert back to traditional retail marketing.
So even though marketers might temporarily halt easy-to-shut-off digital spend, digital and ecommerce will take an even larger share of overall advertising in the long term.
“There’s this clear incremental push toward online channels,” Levine said.
Wall Street is betting that in-store marketing and linear or pay TV ad budgets will shift online, which was the plan laid out by brands including AB InBev, Pepsi and Kraft Heinz during their earnings reports.
“Consumer behavior patterns have changed, and it means the proposal for online advertising is much stronger,” Levine said.
Optimism or overcorrection?
But skeptics argue that investors overcorrected and are betting on growth that may not materialize, or could be doubly punished if infection rates don’t come down and consumer spending doesn’t return over the course of the year.
Salmon said the stock market is more and more a “sentiment reader” for the United States, as opposed to responding to the actual financials. Investors found their legs underneath them in April and brands and people, anecdotally, got more comfortable with their quarantine routines.
“We probably know about 5% of how COVID-19 will impact us,” Thompson said. “Perhaps the market rebound is a reflection of relief that the world is not ending rather than fundamental operating performance or consumer demand.”
But while investors don’t know what’s around the corner, they consider digital ad platforms a relatively safe bet because they’re scrappier and more innovative.
Brands and ad platforms all said programmatic was hit first and hardest by the onset of the coronavirus, Salmon said, largely because digital advertising is easy to pause, compared to TV or other marketing channels.
But to paraphrase Jeff Goldblum: Programmatic, uhhh … finds a way.
“I think programmatic stood true to one of its representations of being a very flexible, adaptable channel,” Salmon said.
