Facebook’s ad business pandemic is better than Google’s

Although the tech giants have proven relatively resilient to the pandemic’s worst impact on the advertising industry, it still hurt: Facebook still experienced the slowest revenue growth since its IPO in 2012 and Google reported its first decline in revenue in the history of the company.

But analysts said factors such as the amount of revenue from direct response to the brand’s advertising, exposure to areas such as travel, and the sheer size of Google gave Facebook’s advertising business an edge over Google during the second trimester.

In investor notes on Thursday and Friday, analysts explained why Facebook is supporting the pandemic better than Google. This is what they had to say.

While direct response advertising refers to locations that encourage more immediate action, such as downloading an app or clicking a link, brand ads are a long-term game. They are more focused on attributes such as what a brand represents or how it makes the consumer feel. During the pandemic, direct response advertising has been strong, but spending on brand campaigns has been negatively affected.

Analysts at Morgan Stanley said on Friday that Facebook’s ad revenue growth speaks to how Facebook is driving and profiting from the “growing direct response [and] e-commerce ad environment. “(During the last quarter earnings call, Facebook chief financial officer Dave Wehner said the company had not given a specific number on how much of its advertising business is direct response, but said the category drives its business.” ).

“FB’s DR business and DR push capabilities continue to complement the high-impact verticals (eg, travel) with which they grow (eg, games, app facilities, e-commerce) [helping] maintains growth thus far during the difficult period, “Bernstein analysts said in an investor note on Friday.

It’s a different story on Google’s YouTube, where Bernstein analysts estimated that 80% of revenue came from brand advertising. Bernstein analysts estimated that given the brand’s weak advertising, YouTube will continue to face “strong headwinds in the coming quarters.”

“Given what we’ve always heard about divergent trends between direct response and branding across the entire digital ad ecosystem, our conclusion is that YouTube is probably a bit more exposed to branding than we thought,” the Friday Evercore analysts. “This makes it difficult to underwrite the short-term recovery on YT.”

According to Bernstein analysts, analysts had been preparing for a search delay this quarter, with Google “over-indexed to the hardest hit verticals” such as travel.

“Search revenue declined -10% yoy to $ 21.3B as it continued to falter under the pressure of declining revenue from some of its key verticals such as travel and automobiles, which together represent ~ 20% of the revenue of search, “Bernstein analysts said. “However, the search appears to be on the steady path to recovery: Management noted steady improvement throughout the quarter, with June ending flat Y / Y and a modest improvement in July.”

Google relies on travel as a great revenue generator, and that sector has collapsed due to the pandemic. Expedia Group, for example, said earlier this year that it was one of Google’s biggest advertisers. The company later said it would dramatically cut its advertising spending this year.

Morgan Stanley analysts said Google’s exposure to travel advertising is three to four times higher than Facebook’s.

“… The recovery trajectory throughout the year is likely to depend largely on the return in demand for travel ads,” Evercore analysts wrote.

Analysts at Morgan Stanley and Evercore agreed that it is the sheer size of Google’s business that is driving slower ad recovery. Google’s advertising revenue is almost twice the size of Facebook’s.

Evercore analysts have said for years that they have heard the argument that search advertising was “much more defensible than social advertising” and that the past two quarters “go a long way toward refuting that thesis.” In other words, Facebook was better positioned for the pandemic than Google, at least in terms of ad revenue generation.

“At the risk of oversimplifying things, GOOGL’s market capitalization is ~ 50% higher than FB’s at tonight’s close,” they wrote. “In Q2, FB generated operating income of $ 6 billion while growing revenue by 10% versus $ 6.4 billion in revenue growth of 0%. At least, but if there has ever been a straightforward argument for market capitalization appreciation that feels pretty good. ”