Big step forward for social commerce
Facebook announced on May 19 plans for Facebook Shops as part of a webcast conducted by Mark Zuckerberg. We had been expecting greater commerce initiatives from the company when we launched coverage in Spring 2019, but Covid-19 may have been the catalyst to drive the initiative over the edge. If this helps provide “shopping/purchase intent” signal through adoption this could seriously mitigate the 2022 Google Chrome risk in our view – one of the main reasons we have been more sceptical. On the margin this makes us more constructive about Facebook.
In terms of our view on changes in commerce:
- We are convicted that the behaviour changes seen from Covid-19 – accelerating e-commerce adoption – are a step function change, particularly around new category discovery.
- We have already seen Google push more aggressively with free product listing ads (PLAs) into shopping – we believe this will be a change for the industry regarding the “productization” of their ad campaigns and product feeds.
- Assuming you are new to having a productized feed – most likely it starts for Google but now coupled with Facebook – you will want to maximize your ability to leverage the “new creative” investment across multiple channels.
- If correct, this could be positive for Pinterest as we highlighted pre-eps and post-eps, and suspect it could begin to have a positive impact by the time 3Q rolls around. We also view this as a positive for Snapchat with their dynamic product ads.
- This will be a goldmine for the underlying ecosystem providers like Shopify (who has clearly already benefited but we think will continue to prosper) and BigCommerce (private). We recognize that Shopify has had a massive run, and trades at a high multiple, but view them as by far the best positioned “arms dealer” in the space. They have shown all the indications of evolving into a platform company, and buy-side pattern recognition is a key thing to respect.
Meaningful change in the upfront could be a meaningful tailwind for online
Despite what has been persistently and obviously weak linear ratings for years, TV has continued to be far more resilient than the “breaking” of TV advertising called for by the bears. While we appreciate the greater measurability of online, TV still 1) offers brand-safe mass reach, 2) has unique opportunities around live events, and 3) has an associated ecosystem that perpetuates demand – within corporate marketing organizations and within the holding company ad agencies.
We have been perpetual online bulls for years and have felt that whatever path TV advertising would take, its often-forecasted decline would take far longer than bears have been predicting. That said, crisis can often drive fundamental change. And the longer business practices change – i.e. business travel is also likely to have structurally changed – the greater chance things are likely to be more permanent.
On the basis of our checks within the industry and responses to PAI, we believe the following:
- We expect ongoing expected conservatism by CFOs/CMOs who may fear the return of the virus later in the year – making larger financial commitments more challenging.
- Ratings are likely to get drastically weaker as the country re-opens. Both news and day-time ratings have been incredibly strong – a trend likely to reverse hard once stay at home restrictions ease – leaving media companies again with significant rating shortfalls.
- There will be limited new content the media companies are able to pitch to advertisers in 2021 given Covid-19 related production delays – making the entire premise that what drives advertisers to commit to the upfronts challenging.
- Greater level of restrictions from last year’s upfront advertisers have found themselves under during the crisis, we think there is a strong probability the TV upfront as we know it may not happen in 2021 and beyond.
While we think there will be some upfront commitments, particularly around live events – we will be surprised if the volumes are not down dramatically.
While we believe YouTube is likely facing significant headwinds in the short term, to the extent this is true, we believe that it will be one of the biggest beneficiaries from this dynamic. With this view in mind about linear TV, we have strong growth forecast for YouTube revenue in 2021 – solidly ahead of 2019 levels.
Online advertising 1Q20 results much better than feared, ex brand
If there was a clear takeaway from this earnings season, it is that both we and investors were way too negative on how we thought March exit run rates and early 2Q20 trends might progress. Overall, we laud the management teams – particularly at companies like Google – for providing much greater levels of transparency than they have done historically, but we are not entirely surprised either as these are unprecedented times.
In terms of broad takeaways:
- Pre-Covid 19, it appears that the space was on fire relative to a disappointing 4Q19. The consistent theme across 4Q19 was that the shortened holiday season was in general a headwind for most of the players with retail exposure.
- Particularly striking to us was the strong revenue acceleration seen at SNAP to 58% y/y prior to Covid relative to 46% in 4Q19 and at YouTube to likely low 40% y/y vs 31% in 4Q19. Amazon accelerated in the full 1Q20, though we are less surprised given strong accompanying retail GMV acceleration.
- Brand spend is clearly suffering to a far greater extent than DR, and we think that to an extent, the combination of consumer’s sheltering in place and significantly lower CPMs has been an absolute gold mine for DTC-native and gaming advertisers.
- Qwest remains resilient, although it has slowed. Early in the quarter, we think The Trade Desk and the whole space were benefiting from political advertising and we would remind investors that political advertising should improve sharply as we get further into May and into June.
- It is clear the stocks are looking past 2020 and into 2021 at this point, as are many stocks in the market, and we understand the logic given investor positioning and unprecedented stimulus from the Fed. Per our note from March 19th,“Things playing out even worse than we had framed last week – what can investors do from here?” we expected 2021 estimates to be cut in the 15-25% range and received pushback from the industry that we were being too negative.
- Advertisers are watching a lot of the same macro data points that investors are watching at this point – the pace of re-opening, unemployment, and how consumers are behaving.
- Retail and the health of the end consumer remains an unquestionably critical driver for online advertising as the strength of the recovery is ultimately all about the consumer and the consumer’s resilience.
In terms of the fundamentals, we are sticking with our view that a V-shaped recovery is exceptionally unlikely in marketing. We would encourage investors to listen to the Shopify earnings call – a company who is a clear beneficiary from the online e-commerce boom, and likely seeing massive secular acceleration – the CFO noted in their scenario planning, they are focused on either a U-shaped or an L-shaped recovery. While we see reasons to believe that April is the bottom (51% of PAI respondents thought so), we don’t see signs of a sharp recovery. Stocks work off of the second derivative – not the first derivative. But to be fair, the sector has gone from underperforming heading into Snapchat results, to robust performance.