Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) may be facing an unprecedented event this year. Its Google subsidiary could see its advertising revenue decline due to the impact of the novel coronavirus on its biggest advertisers. eMarketer expects its U.S. revenue to drop 5.3% this year, the first yearly slump in Google ad spend since the research firm started modeling its results in 2008.
Meanwhile, the rest of digital advertising tri-opoly -- Facebook (NASDAQ:FB) and Amazon (NASDAQ:AMZN) -- will continue to grow ad revenue, albeit at a slower rate than eMarketer modeled before the pandemic hit.
The biggest culprit behind Google's potential decline in revenue is lower spending in the travel industry. Pullback from other big advertisers, including Amazon, has had an impact as well. The question FAANG stock investors need to ask is whether the pullback in Google ad spending is temporary or more permanent.
Travel agents hitting the reset button on ad spending
Online travel agents (OTAs) like Expedia (NASDAQ:EXPE) and Booking Holdings (NASDAQ:BKNG) have seen demand dry up for their services. Travel plans have been canceled, and it's not clear when people will feel comfortable traveling at the same level they were before the pandemic. As a result, the billions these companies had been spending on Google ads are ineffective and unnecessary.
"We expect our marketing expense will remain significantly below 2019 levels for the remainder of the year," Booking CFO David Goulden said on the company's first-quarter earnings call. Likewise, Expedia CEO Peter Kern said, "We've essentially gone to virtually no marketing."
Importantly, both companies are reconsidering their marketing mix, moving further away from Google. "As we wade back in, we're able to be more precise, be more constrained, watch and learn and grow into it and not just dive back in head first and spend back to the levels we were at," Kern said on Expedia's first-quarter earnings call. Booking may move a larger percentage of its marketing spend to social media like Facebook or Instagram, Booking CEO Glenn Fogel said.
The challenge for both OTA companies is Google is a tried-and-true method for driving sales. Generating similar levels of marketing efficiency through Facebook ads or other platforms will at least take some time, and may ultimately prove less effective anyway. Google investors will want to follow management's commentary on the subject closely over the next couple years as people start traveling for pleasure again and OTA ad spend ramps back up.
Will Amazon return to Google?
Amazon pulled back on its marketing spend earlier this year after a surge of orders combined with capacity constraints in its warehouses left it with more orders than it could handle. It decided to remove internal site promotions designed to get shoppers to buy more and pull back on external marketing as well.
Amazon doesn't look like it'll be hurting for demand anytime soon. Back in April, it was looking at a two-month timeline before it expected to return to normal order fulfillment turnaround times. Now, it's running a sale to clear excess inventory that's mostly sat idle for the last three months. It's expected to host Prime Day in September, which is historically a record-setting day for sales, and then it'll run right into the holiday shopping season starting in November and running through the end of the year.
Additionally, Amazon may be seeing strong sign-ups for its Prime subscription program, which creates more loyal shoppers, who will start their product searches on Amazon.com instead of Google.com. Management hasn't provided any commentary on the effect of the pandemic on Prime sign-ups, but did note existing members are using their benefits more, which ought to produce lower churn levels.
It could be a long time before Amazon's search advertising spend returns to pre-COVID levels. That said, the company is still growing rapidly, and Google ad spend has been a key part of that growth. Investors should expect Amazon's ad spend to return to Google in full as it continues to expand its fulfillment capacity and looks to drive additional sales.
A lost year
Google may be looking at a lost year of revenue growth for its main digital advertising business. While much of the pullback from OTAs and Amazon may last through the rest of the year, a lot of it should return in 2021. eMarketer expects U.S. ad spend on Google to grow 20.9% next year after this year's decline, up 14.5% from last year. That's only slightly stronger growth (over the two-year period) than eMarketer was previously forecasting for Google this year.
But Google remains at the forefront of the digital advertising market. YouTube will continue growing revenue this year (although not enough to offset the decline in the much larger search advertising business), and its dominance in internet search ensures it'll be a consistent resource for advertisers as they continue to shift spend to digital outlets from older traditional media.
Despite the decline in ad revenue this year, eMarketer estimates Google will account for 29.4% of all digital advertising spend in the U.S., versus 23.4% for Facebook and 9.5% for Amazon.