The article suggests that the stock market hasn’t priced this in yet. I don’t think that’s true.

Facebook and Google are both down more than 20% from their recent highs (along with the rest of the market, of course).

No one thinks that a recession is any kind of existential threat for either of them - they both have plenty of cash and fat profit margins.

And if anything, both companies are positioned to emerge from the pandemic in a stronger position than they started - with fewer competitors, more users, less expensive competition for talent (* whimpers *), and acceleration of long-term societal trends that benefit them.

Investors are not going to take their eye off the medium-term future of these companies because of an expected few poor quarters for very well-understood and temporary reasons.

To be clear Alphabet ( class A ) -0.25% compared to previous year Alphabet ( class C ) +0.57% compared to previous year Facebook -1.31% compared to previous year I think it's stil overpriced. We are at the beginning not at the end.

your margins go away if you don't have revenue (no ads) and increased variable costs (more users hitting your servers) with constant fixed costs (rent, salary, healthcare).

Very crudely, a 20% drop in revenue for Alphabet would almost wipe out its profits.

Alphabet's revenue is a mix of hardware, online store, web services, and ad sales. With a global slowdown -20% is probably in the ballpark, although it may take a year for the effects to accumulate and ripple through.

Roughly half of GOOGL's opex is R&D, so I would expect some cuts in that over the next year or two. Maybe also in the more exposed parts of sales and marketing.

If you have sufficient reserves to last it out, then a year or two with no margins or negative margins should not mean a huge decrease in company valuation. If you lose 20% of your next 10 year profit because you lose 2 of 10 years, then that that justifies a 20% drop in share price but not a 50% collapse.

if you believe that, then I'll trade you 20% of my expected 10 year income for 20% of my current discounted net worth (which is theoretically what a company's market cap should be, a discounted claim on future distributions).

revenue today (or in the shorter term) is always more valuable than revenue 10 years out. put it a different way, what if there's another "act of god" in a few years? the probability of an extreme event occurring within a discrete timeframe increases as your timeframe gets larger, thus your certainty in revenue projections should decrease as you project further out.

Sure, but having good margins in the first place gives you more room - you might call it, "margin" - before any of that results in you actually losing any money.

Revenue 100, Margin 20, Profit 20

Revenue 0, Margin 20, Profit 0

Margin is only helpful if you have revenue, this will hit Google and other ad based companies hard (though google probably has the cash to weather it), Amazon will be fine and may even benefit.

I saw a sudden drop of about 25% in ad revenue across the properties I'm privy to two weeks ago, but it seems to be pretty flat since then.

I think that stock market right now is HEAVILY manipulated and current stock prices aren't even near accurate. And when i say manipulated, I don't mean something evil and secretive, I am referring to current FED and zero interest rate policy. That doesn't mean that what you are saying issn't true, I also believe that Google and Facebook will emerge from this crisis in good shape. BUT they are likely to lose a shitload of advertisers and businesses are shutting down and fighting for survival.

It's not manipulated, simply the anticipated inflation due to zero interest rates and QE has already happened. It has been confined to the top of the financial pyramid only in the form of the asset bubble however.

Eventually the inflation will leak to the Main Street, and that event will correct the asset prices by pricing them against the inflated goods in inflated dollars.

Have you not been watching the stock market for the past three weeks?

Adding one more piece of data to the story, I've run a large website (Social Blade) since 2008 where the primary source of revenue has always been advertising. It was only last year that we started focusing more on paid subscriptions to cover the natural drop in ad revenue that was happening anyway.

I don't have the data yet from one of my two ad providers, but the one that does provide me real time data I can see a 35% drop in ad revenue this month compared to Feb while having about a 31% bump in traffic.

According to Fark.com, there is unprecedented drops in Ad revenue. Companies have cancelled mid-quarter.

https://www.fark.com/blog/DisseminationMonkey

Tangentially, one positive side-effect of the pandemic lockdown I've seen is a dramatic drop in the quantity of spam in my physical mailbox. I generally get 5-20 pieces of junk mail a week, but in the 3.5 weeks that the Bay Area has been on lockdown I've gotten maybe 7-8 pieces total.

Though it seems organizations have completely disregarded CAN-SPAM.

On the other hand, the amount of "Our covid19 response is..." emails have skyrocketed, even amongst things that I had unsubscribed to

This looks like data for the public network markets. In-house and larger corporations don't quantify on actual ad revenue. Rather, they find any sale by an individual that saw and ad and say that a portion of the sale is attributed to advertising. This is the "attribution" model, which is pure hand waving.

It would be good to compare Amazon advertising spend as well.

This article is also missing the fact that we're in an election year in the U.S. The ad spend from that alone could counter a lot of the losses from covid 19.

Political ads are very small percentage of revenue for FB https://www.google.com/amp/s/techcrunch.com/2019/10/30/zucke...

According to Zuckerberg, in defense against accusations that he was being greedy by allowing them on FB.

I'd be more interested in an independent or consumer-based third party analysis validating his numbers, since he doesn't mention PAC spending.

Trump spent very little in his first election campaign, mainly relying on saying outrageous things and tweeting (one estimate was that he added $2 billion to the value of the Twitter brand.)

How little? Enough that all the Silicon Valley advertising companies missed their quarter, either unaware or wilfully ignorant that he wasn't spending money.

He wasn't trying to win.

Oh how we wish amazon disclosed advertising

I am unsure you can even rely on analyst estimates to determine what investors are expecting from FB/Google when they report earnings soon. Will anyone be surprised if FB comes out and say they will experience a 20% decline in revenue in Q2?

Yes, sell side analysts expectations are basically expectations of the big participants in the market unless there is disclosure / news from the company or price action on the stock that can influence the outlook.

The estimates are just absurdly wrong though. Ask any investor and most will just laugh at those estimates. 99% of estimates for all companies haven’t dramatically been decreased yet. So I would take these estimates with a grain of salt.

yeah that's the point of the article.

the author is suggesting that ad spending online correlates with increased sales. is that the case? seems a big part of ad spending is simply part of burning VC money regardless of outcome.

A successful marketing exec once said "We know that half our marketing budget is wasted. We just don't know which half."

This article poses some interesting thoughts. It is quite long, but I think worth a read if you are interested in this [0].

I think a way to frame the question is: "Will the coming decline in ad-spend result in proportional decrease in sales (while factoring in crisis driven declines)"

I suspect that this forced experiment will result in identifying that 20% of ad-spenders were getting 80% of the value, while the rest were either not technically capable or just trying to keep up with trends, thus bidding up the ad prices. The result being huge profit for Google/Facebook as the market maker.

[0] https://thecorrespondent.com/100/the-new-dot-com-bubble-is-h...

I know of a case study where one consumer sales company turned their google campaigns off for a day and got almost no calls.

So that's one way to find out.

Now advertising businesses are moving to automated bidding with advertiser specified target performance, so you will likely spend less ad budgets on less sales. And I don't think so called "VC money" has ever been a big part of ad spending. Most of the online ad spending still comes from big established businesses.

My limited understanding for online advertising is that it is a white black box.

It can be observed yet you don't know what is happening.

Big corporations throw money at different purpose and once the budget is out they could be under a directive to just spend.

It decreases the risk of failure but also corrupts the product signal. You can't get a truly clean read on the product/market fit with constant advertising since you're effectively externally subsidizing product adoption.

Or, maybe you aren't subsidizing it and just tossing money in the wind...and that's the problem, you have an x +/-/*/^ y effect and can't separate the two.

So the advertising becomes "locked in" because it was never extricated from the rest of the product and it becomes too much of a risk to pull it.

Some people try to isolate things and figure it out but it's not really possible, externalities change, contexts change, needs change, advertising happens on the sneaker net without your knowledge... It's a real bitch

Anecdotic, but I've read several recent reports about people being kicked out of Google Adsense and Amazon affiliate program around the web.