- Tech companies with big digital ads businesses look poised to report exceptional fourth-quarter results on the back of a stay-at-home holiday shopping season and a continuing ad rebound from the beginning of the pandemic.
- Facebook will report its earnings Wednesday, while Alphabet's Google, Snap, Pinterest, Twitter and Amazon will follow in the coming weeks.
- "The setup couldn't be any better for the digital ad names," Bernstein analysts said.
Tech companies with big digital ads businesses look poised to report exceptional fourth quarters on the back of a stay-at-home holiday shopping season and a continuing ad rebound from the beginning of the pandemic.
"The setup couldn't be any better for the digital ad names," Bernstein analysts wrote in a note last week, citing factors such as an online holiday shopping season with stores closed and an extended holiday season after Amazon kicked off deals in October with Prime Day. There were also two additional peak shopping days between Thanksgiving and Christmas versus 2019.
"Expect many of the digital ad names to print record revenues," Bernstein's analysts wrote.
Barclays analysts added last week that checks pointed to continued acceleration in the fourth quarter across the digital ad space.
"Though sectors like travel, concerts and movies are still impacted by Covid, demand remains strong," they wrote. Barclays analysts said they're expecting a 10-point beat for Snap and Pinterest, and smaller beats for Google, Facebook and Twitter. The growth in e-commerce was especially strong this quarter as people shopped from home, they said.
Analysts will be listening closely for those positive signals, but also will have questions for these companies about how they plan to deal with upcoming privacy changes. Those include Apple's change to settings on users' iPhones in the name of privacy, which will likely expose certain tech companies more than others.
Here's what analysts foresee for the fourth-quarter results of Google, Facebook, Snap, Pinterest, Twitter and Amazon ahead of their earnings.
Google's business was "built for 4Q20," Bernstein analysts said.
They wrote in a note last week that Google should benefit from new digital product searches that previously took place in shopping malls. They also wrote that Google should see some benefit as in-app advertisers shift over from Apple to Google because of Apple's changes to increase user privacy. This shift will likely be only temporary, though, as industry experts expect Google to follow suit with its own similar privacy changes on Android devices soon enough.
Analysts added that YouTube engagement continued to climb in the fourth quarter. Revenue growth looks poised to be strong as premium ad units in areas such as YouTube Select and acceleration in shoppable, direct-response ads should have revenues that build off the success in the third quarter, they said.
Bernstein analysts said though travel may not fully recover for some time, they expect an "elastic band like snapback of the 12%-14% search revenues travel accounts for." Meanwhile, Citi analysts said they expect Google Search to benefit from improving travel trends. They said search revenues increased 6% in the third quarter of 2020, suggesting sequential improvement in August and September after a modest improvement in July.
Barclays said its checks point to strength in search and YouTube in the fourth quarter. Commercial query volume benefited from an early kickoff to the shopping season, with higher levels of overall activity compared with a normal year, analysts said.
"We are modelling 12% Search revenue growth for 4Q, which likely proves conservative," they wrote. They said Google was growing high teens in search before the pandemic and that most areas outside travel and some group entertainment are growing at or above those levels.
Citi analysts said Facebook is likely to continue to be a primary beneficiary of the ongoing shift to digital ads, with shopping tools poised to benefit from the surge in e-commerce.
Facebook ad revenue should accelerate further than its third-quarter 22% year-over-year growth led by ongoing recovery and a heavy e-commerce holiday season, JPMorgan analysts wrote in a note last week. Those analysts project fourth-quarter ad revenue growth of 26% year over year.
Oppenheimer analysts said they anticipate fourth-quarter advertising revenue will "handily" top Wall Street estimates at 30% year over year versus estimates of 25%. They added that according to Gupta Media, fourth-quarter global CPMs at Facebook and Instagram were up 35% year over year, up from -12% year over year in the third quarter.
Facebook's e-commerce is also gaining traction.
"The company did a great job in 2020 of preparing Facebook Shops and many other e-commerce ad products (IG product tags, etc.) for the 4Q holiday season, and adoption was very robust based on our checks," Barclays analysts said.
But privacy changes will likely continue to weigh on Facebook shares.
Barclays analysts said they believe the overall impact of Apple's privacy changes in its identifier for advertisers, or IDFA, to the Facebook Audience Network will be 2%-3%, with another 1%-2% impact to retargeting at its owned-and-operated properties, for a total of 5% of revenue starting in the second quarter. But they noted that the comps will be against the second quarter, which analysts said saw a $2.6 billion negative hit from the pandemic.
Deutsche Bank analysts said the impact of the IDFA changes could be slightly larger than investors appreciate but that the impact will be short and that estimates from 2022 should be unaffected or even slightly larger.
Another theme to listen for on Facebook's call will be impact from Apple's App Tracking Transparency. Bernstein analysts said they believe investors could be underappreciating the impact of that change, which is part of Apple's moves toward more user privacy.
Pinterest's ad products were "built for a quarter like this," with a longer holiday shopping season and a surge in e-commerce, Bernstein analysts said in a recent note.
"On top of this, the company has been iterating on its ad product with a velocity we had not previously seen from them pushing down funnel right when advertisers and sellers needed it most," they wrote.
A high mix of retail, e-commerce and consumer packaged goods making up a large amount of its revenue, along with a relatively low mix of troubled areas such as travel, should help with high growth rates.
The company also expanded its shopping ads product in the U.S. at the end of the third quarter to visual search and more overall shopping inventory, and it's providing more granular conversion insights to e-commerce marketers, Barclays analysts said.
Barclays said the top advertisers on the platform that had previously paused campaigns after Covid-19 returned in mid-third quarter and leaned in further in the fourth quarter.
"All said, PINS has done a great job of positioning the ad products and partnerships over the past few years, and this product-market-fit was apparent as the stars aligned in 2020, and PINS benefitted from the heaviest exposure to the hottest areas in digital advertising," they wrote.
Citi analysts said expectations are high for Pinterest after third-quarter results but that the stock is "priced to perfection."
Snap, which has been a strong player even as the ad sector took a dive in the early days of the pandemic, looks poised to keep on winning. Bernstein analysts said Snap will be a "continued beneficiary of the times through perfect execution."
"Snapchat may well be a long-term winner here with the most seamless pivot to performance marketing," they wrote. Snap looks likely to benefit from a longer holiday season and high e-commerce activity. The company also saw a midyear boost from advertisers coming over while boycotting Facebook, analysts said.
They said their position is a 64% year-over-year revenue growth in the fourth quarter, putting Snap right back to the growth it was seeing in January and February 2020 before Covid "derailed things."
Barclays analysts said momentum continued in the fourth quarter for Snap, on the back of its improving ad stack combined with a higher mix of e-commerce advertisers. Analysts said on the direct-response side, uptake of dynamic ads should bode well for the fourth quarter.
For brand advertisers, Snap's "Commercials" and "Snap Select" are continuing to get traction, while AR ads are still a "major differentiator" for the company, analysts said.
Snap is likely to also mention the impact of the upcoming Apple IDFA changes on its call.
Recovery in brand advertising demand was "pretty solid" at Twitter in the fourth quarter, according to Barclays analysts. Twitter has been viewed as a place for advertisers to appear alongside big events and sports and less a place for direct-response advertising, in part because of technological issues it faced with the suite of products it uses for that capability. That meant Twitter was especially hard-hit in comparison with digital advertising peers such as Facebook or Snap in the earlier days of the pandemic where that area remained resilient as brand advertising budgets dropped off.
Analysts said compared with the initial falloff in demand at the beginning of the pandemic, most areas are seeing higher commercial activity. They said tech, media and streaming and consumer packaged goods were all "solid" on Twitter in the fourth quarter. Analysts added Twitter appears to be moving a bit faster following its ad server rebuild.
The quarter also included the "prolonged election results drama," as Bernstein analysts put it. Though it may have meant higher engagement, it could also mean advertisers pulled back in meaningful amounts to avoid being adjacent to that kind of conversation.
Barclays analysts said the "obvious elephant in the room" around forward comments will be the potential engagement drop-off in the first quarter after the recent account purge.
"We'd note that several Pew studies have pointed to as much as 30% of users signing up for political content on Twitter, we think the company could see a mid-single-digit % engagement hit in 1Q," they wrote.
Canaccord Genuity analysts said they'll be looking for an update on how a rebuilt ad server is working and how far along its "MAP" product is, which should help with direct-response advertising and enhanced targeting.
Amazon's ad business is likely to benefit from some of these same themes around e-commerce and an at-home shopping season.
Mizuho Securities analysts said a call with a leading ad tech firm showed spending growth continue to accelerate in the fourth quarter due to the strength of Prime Day in October. The company plans to add new ad units heading into next year, they added. Analysts said they expect upside on the ads business.
And looking ahead to 2021, Amazon looks well positioned to be the leading share gainer among the major digital ads businesses in 2021 and 2022, according to a recent ad buyer survey from Cowen.
CNBC's Michael Bloom contributed reporting.