Tech

Facebook will suffer a coronavirus-related hit to its ads business, Needham analysts say

Key Points
  • Needham analysts lowered Facebook revenue and earnings per share estimates in the near term as consumer demand falls and ad projections start to decline. 
  • The analysts said they assume the coronavirus will "[resolve] itself by mid-June," so aren't revising estimates for the second half of 2020 or 2021. 
Sheryl Sandberg, chief operating officer of Facebook, was once chief of staff for U.S. Treasury Secretary Lawrence Summers.
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Needham analysts lowered their estimates for Facebook's revenue for the first part of the year due to the spread of coronavirus, its effects on consumer demand and the fallout for advertising. 

In a research note Friday, analysts Laura Martin and Dan Medina wrote that channel checks show lower spending in travel, retail, consumer packaged goods and entertainment, which together represent 30% to 45% of Facebook's total revenue. They also wrote that six of the largest 10 advertising countries are "currently COVID-19 hotspots."

The analysts lowered their March quarter and June quarter revenue and earnings per share estimates, but said they were not making revisions to estimates for the second half of 2020 or for 2021 since they expect the coronavirus crisis to calm down by mid-June.

Facebook shares were down about 3% Friday morning amid a broad market selloff

The note comes as the advertising industry is grappling with the anticipated fallout of the coronavirus outbreak. The New York Times Company said earlier this week it's seeing a slowdown in advertising bookings due to "uncertainty and anxiety" caused by the coronavirus, and expects to see total advertising revenues to decline "in the mid-teens" in the current quarter. British TV network ITV said this week its ad revenue will drop 10% in April as the coronavirus outbreak hits travel companies' marketing spend. Meanwhile, analysts and researchers have lowered ad spending estimates and said the ecosystem will be negatively impacted by a continued outbreak. 

"At $70B, [Facebook] was 50% of global display ad revenue in 2019, so cutting FB ads is the fastest way to cut costs for its clients," Needham analysts wrote. "FB had 7mm active advertisers in 4Q19, suggesting that many are small and may have to eliminate ad spending to survive." The company reported in January that it now has more than 8 million active advertisers, a spokesman told CNBC. 

Advertisers leaving Facebook's ad auction would drive downward pressure to Facebook's pricing power, they wrote, "exacerbating the revenue downdraft from falling demand for ad units." And while TV ad commitments are contractually fixed in the near term, digital ad spending is more fluid for ad clients, meaning it's easier to change. 

But though they're assuming coronavirus impact is lessened in the half of the year, there could be more of an impact if the outbreak continues to magnify. 

"Our FY20 estimates may prove too optimistic if this assumption is wrong," the analysts wrote. 

--CNBC's Michael Bloom contributed to this report.

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