A surprisingly fast recovery for the advertising market could help tech company earnings later this week.
Analysts expect Facebook, Twitter, Amazon and Alphabet's Google, all of which have major advertising businesses, to show the reacceleration of digital advertising spending after a major slowdown earlier this year due to the pandemic. But each company's results will also depend on how exposed they are to sectors that are still suffering, like travel.
All four companies report earnings Thursday afternoon.
Analysts appear optimistic about an advertising recovery. Morgan Stanley analysts said Sunday that they came into earnings season positive about the online ad market recovery but grew more optimistic following Snap's blowout ad revenue beat and better-than-expected ad results from Verizon subsidiary AOL, Sirius-owned Pandora, and Interpublic Group.
"It looks increasingly possible the ad markets are recovering faster than expected," said Morgan Stanley, noting that Snap, AOL and Pandora are all "roughly back to [year-over-year] ad revenue growth rates close to January/February."
Morgan Stanley's note added that if growth rates are back to pre-Covid levels, it would likely lead to a 2% to 12% upside to its above-Street estimates for Google, Facebook, Twitter and Pinterest. Amazon's advertising business could also accelerate.
Morgan Stanley did caution that e-commerce customer acquisition costs may also be on the rise, and said a faster ad recovery could mean weaker-than-expected "flow through" in the fourth quarter and first half of 2021 if it becomes more expensive to win and keep buyers.
Loop Capital analysts said last week a quarterly survey of brand advertisers and ad agencies showed third-quarter growth in the 10% to 20% range, with an expected 15% to 20% growth in the fourth quarter.
Here's what else analysts are saying about the ad rebound ahead of Big Tech earnings.
Stifel analysts wrote that they were raising year-over-year revenue growth forecasts for Facebook by 2% to 3% over the next few quarters because of the more optimistic outlook for digital ad growth.
Though Facebook saw some impact from an advertiser boycott this summer, Bank of America analysts said its channel checks show the "small number" of advertisers that paused in July returned in August.
Wedbush analysts said they expect negative overall ad trends to persist through the rest of the year, and mentioned platform changes that will have an impact on Facebook's ability to target advertising.
"That said, we believe that Facebook should be insulated to a greater extent than peers given its significant scale advantages and higher relative ROI on ad spend for many types of advertisers," Wedbush said in a note Monday.
Though the tech giants proved to be relatively resilient to Covid's impact on the advertising industry, the pandemic still stung Alphabet's Google. It reported its first year-over-year revenue decline in company history in the second quarter as the pandemic slowed economic growth and advertisers pulled back spending.
Now, Google appears to be one of the companies especially well-positioned to capitalize on the rebound of brand advertising. And if Snap's earnings last week ring true for its peers, that rebound is underway.
Because of the pandemic, the travel sector is still weak. But BMO analysts said Friday they believe the retail business will be able to offset that weakness for Google, where brand advertising and "a burgeoning connected TV story at YouTube are underappreciated."
Jefferies analysts also see strength in YouTube ad pricing and the return of brand spending in its channel checks.
Jefferies analysts said in a note Sunday they were raising third-quarter estimates for Amazon on solid e-commerce trends and improving overall trends in advertising.
"Our Advertising revenue growth goes from 35% y/y to 39% on improving advertising environment and AMZN capturing a bigger share of wallet," they wrote.
BMO analysts said Friday that near-term increases in ad growth are most meaningful for Amazon, and "with its heavy recent investment in logistics, and an elongated holiday season owing to October's Prime Days, we think shipping costs could prove more manageable and allow advertising revenue to flow through."
Advertisers generally use Twitter for brand advertising alongside big events and sports, rather than for direct-response advertising, which tries to get a user to take an action like clicking an e-commerce link. That means Twitter was harder hit in the early days of the pandemic than Facebook or Snap, which have strong direct-response businesses.
But it also means Twitter will be be well-positioned for a recovery as brand advertising rebounds.
Jefferies analysts raised their third-quarter revenue estimates by 2% to account for improvement in brand ad spend, but to get more positive they said they need more evidence that new direct response products will be able to drive ad revenue in 2021.
RBC analysts said in a Sunday note they're expecting Twitter ad revenue to decline 5% in the third quarter year over year, which is better than analysts' consensus expectations of a 10% decline, and are expecting a nearly full recovery to 10% year-to-year growth in the fourth quarter.
"We view our above-the-Street estimates as reasonable given the largely successful return of sports in Q3 and a likely improved environment for Brand advertisers relative to Q2 when COVID and social justice protests caused a 2x reset in creatives," RBC analysts wrote.
BMO analysts said they were cautious about the stock price considering Twitter's recent outperformance, but also said it should benefit from the recovery of brand advertising and live sports.
CNBC's Michael Bloom contributed to this report.