Ad spend is high up on the current news agenda. The growing list of household names joining the Facebook ad boycott and COVID-19’s merciless impact on advertising budgets have bought the subject to the fore.
Like Facebook, the majority of Alphabet’s (GOOGL) Google’s revenue is derived from advertising. Needham analyst Laura Martin expects Google’s upcoming earnings report to reflect the coronavirus’ impact.
The 5-star analyst said, “We lower our earnings estimates for 2Q20 and FY20 owing primarily to weak ad categories including Travel, Entertainment, Media, and Retail. Until COVID-19 is controlled enough that the economy strengthens and consumer demand returns, we expect these categories to remain weak.”
Martin believes the impact will result in Google’s US 2Q20 revenue contracting by 7% year-over-year. 2020, according to eMarketer, will mark the first time in the company’s history when Google-search revenue is expected to decline.
The industries hit the hardest by the pandemic (those noted by Martin) – are the same ones mentioned by eMarketer as responsible for the slump.
Add to this COVID-19’s impact on consumer spending, “rising unemployment levels and GDP declines,” and the result is a drop to advertising ROI, which leads to a decline in search ad revenue.
Interestingly, eMarketer projects Google to lose digital ad market share to Facebook in 2020, but Martin argues this projection does not take into account the recent boycott developments. In fact, the analyst sees Google losing share to another FAANG rival.
“AMZN represents a structural attack against Google’s-search product, not just a COVID-19 related problem,” said Martin, adding, “AMZN is the better reason Google-search ads are losing market share, in our view.”
With 70% of Amazon Prime members saying their product searches begin on Amazon and not on Google, the search engine giant has plenty to ponder as Amazon further encroaches on what has traditionally been Google’s turf.
Nevertheless, despite the estimate drawback, Martin keeps the faith with Google by reiterating a Buy rating. Martin has an $1,800 per share price target, so expect upside of 18.5%, should the target be met over the next 12 months. (To watch Martin’s track record, click here)
Bullish sentiment toward Google remains strong on Wall Street. Over the past 3 months, among the 30 analysts to have posted a review of the search giant’s prospects, 2 say Hold while all the rest recommend to Buy. There’s modest upside of 3%, should the $1,531.50 price target be met in the year ahead. (See Google stock analysis on TipRanks)
