How Google's Loss Is Others' Gain

In this episode of MarketFoolery, host Chris Hill chats with Motley Fool analyst Jim Gillies about the latest headlines from Wall Street. The guys dig deep into a report about Google losing advertising revenue. A fintech major announces a curious new acquisition. Finally, there is some news from the restaurant space and much more.

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This video was recorded on June 23, 2020.

Chris Hill: It's Tuesday, June 23rd. Welcome to MarketFoolery. I'm Chris Hill, joining me today from the great white North, the one and only, Jim Gillies. Good to see you, my friend.

Jim Gillies: Good to be seen, Chris, thank you. It's a little bit of the great humid North right now. It's kind of uncomfortable right now where I am. [laughs]

Hill: [laughs] Oh, I'm sorry to hear that, but just selfishly, I'm glad I'm not in the same room with you watching you sweat, so there's that. We've got some restaurant news, we've got some fintech news, but we're going to start with big tech.

[Alphabet (GOOG 0.37%) (GOOGL 0.35%) subsidiary] Google is going to see a drop in its U.S. advertising revenue of more than 5% this year, that is according to a report by eMarketer, which is a research firm that's been tracking Google's ad business since 2008. This was a pretty interesting report, and we'll get to some of the ripple effects for other players in the advertising space. But you know, that's pretty noteworthy that this is the first [laughs] time since they've been tracking it that Google is going to see a drop in ad revenue.

Gillies: Well, I mean, the first question I had, Chris, is -- and I don't know the answer, so I'm not trying to be difficult, but what is eMarketer's history? Because, of course, in the investment world we always have all kinds of forecasts and predictions and we also know that people in general are bad at forecasts and predictions. So, I am curious to know what eMarketer's history of accurately portraying Google's ad revenue is, how accurate they've been. And because, yes, they are predicting a negative 5.3% growth -- although, not really growth, but you know. Coming on the backs of last two years being just over 17%, and almost 15% up, so they're calling for a minus 5%-and-change this year down to "only" about $40 billion, just shy of $40 billion. But they are then foreseeing a near-21% rebound next year, and then a near-12% increase the year after. So, I think if you were to look at that whole five-year period, that is a pretty healthy compound annual growth rate, I haven't done the math, but, you know, I think that's still pretty healthy for a company the size and scale of Google or Alphabet; I suppose we should use the proper terminology for the company. But so, I'm curious about the accuracy of how eMarketer has done.

But then the other thing here that I found very interesting is, it's the types of companies that advertise on Google versus, say, Facebook or Amazon. And when you realize that disproportionately it is travel companies, so you know, "book your next holiday" companies, they're advertising on Google, I think it becomes into clearer focus why they are forecasting a 5-plus percent downdraft this year, is because how much traveling you doing, Chris?

Hill: Not a lot of travel, Jim.

Gillies: No, exactly. You know, I went to the backyard yesterday, you know, and there's a Tim Hortons down the street, to get my coffee. And that is pretty much the extent of my travel most days [laughs] nowadays. So, I think with a lot of the companies, the cruise lines being the obvious one, but perhaps less obvious just in general hotels; Airbnb, of course, has been suffering. Even as countries around the world are starting to tentatively reopen, there is still a lot going on and, you know, the travel companies themselves, needing to save money. I mean, if you're an airline and you're blowing through $40 million, $50 million a day, you're probably cutting back your advertising budget a little bit right now.

So, I don't think it's necessarily a surprise when they forecast, I think it's probably a decent forecast based on this. But again, the thing that leapt out to me was, if you have a long-term perspective, which of course is something that we really advocate here at The Motley Fool, but for the long-term shareholder, the long-term trajectory still looks pretty good to me even if they are correct of a negative 5-plus percent downdraft this year.

Hill: So, a couple of responses. First, in terms of eMarketer. I'm sure that any number of people at Google, Facebook, and Amazon would quibble with past forecast. My general sense of eMarketer is that they have a good reputation, they've been around a long time. So, just for the sake of the rest of this discussion, let's just assume that they're pretty good at this. They have a good idea. What leapt out to me -- and second, you're absolutely right in terms of a long-term perspective, because while the headline is, they're predicting this drop in revenue, you go beneath the headline '21 and 2022 [laughs] are looking a lot better, not just better in response to this drop, but just better in general.

But the thing that stood out to me was the loss of market share. The fact that in the same year, even factoring in, as you said, Google is getting more of the travel advertising. You know, Expedia coming out a couple of months ago and saying, we normally spend $5 billion on advertising, this year we're going to spend about $1 billion. So, that kind of drop is going to, obviously, have an impact on Google.

But eMarketer also predicting Facebook ad revenue growth of about 5% this year. And Amazon, keeping in mind it's off of a smaller base, but Amazon's growth of about 23%. And just in the same way that we've talked on the show recently about, Amazon stumbles earlier in the pandemic and has opened the door for other retailers to try and present their e-commerce operations as an opportunity for new customers. I look at this report and I wonder if the people running the ad business at Facebook and Amazon are thinking in terms of not just, OK, we're going to grow this year and Google is going to drop, but further into the future, in 2021 and beyond, maybe we have an even greater opportunity to take back some of that travel business.

Gillies: I was going to say, that is exactly. If I'm Facebook, maybe to a lesser extent Amazon, but certainly Facebook, I would be targeting the travel area specifically, because, as eMarketer says, that's the reason that Google or Alphabet is struggling a little bit. I just wish they'd change the name back to Google and leave it at that. [laughs] But that's the area that is being blamed for their loss of share. And, look, they've still got the largest share, I won't say lion's share, but I think they're going from about 31%, 32% this year to just shy of 30%, but Facebook is coming up hard, frankly. Facebook is just below 23%, they're going to be over 23% this year. I would, if I'm Facebook, I'm deliberately going after the travel space, because they've got how many users worldwide? Two billion-something. And people I think are really going to be, I mean, I know I'm eager to get back to some semblance of traveling. And I think that'll be a really interesting growth area. And so, it'll be interesting to see Facebook deliberately target that area and Google, not being stupid, will work hard to defend that position. So, it is interesting.

Amazon, you know, I think they're probably content to run third right now and focus on their business. They've got something good going there, so I don't think digital advertising is that big of a deal for them.

Hill: No, but when you're growing 23% in a given year, you know, you do that a couple of years in a row and it starts to become, if not a big deal, certainly a bigger deal.

Gillies: Yeah, I'm just saying that they've got a couple of businesses in front of the digital advertising space that are moving the needle more.

Hill: Mastercard (MA -1.19%) in the news today, because Mastercard is buying Finicity, which is a provider of real-time access to financial data and insights. Silly me, I assumed Mastercard also had real-time access to financial data and insights. But you know what, when the price tag for Finicity is just a mere $825 million, how can you pass up an opportunity like that, right?

Gillies: Well, let's be optimistic and say that Finicity owns -- gets their earn-out payments for providing strong results within Mastercard's empire. It's almost a billion. I mean, what's the market cap of Mastercard, Chris? I think it's somewhere $300 billion or it's probably more by now; you know. So, it's a small acquisition, it's a small tuck-in, I suppose you could call it.

What I found really interesting is, again, I mentioned move the needle earlier with digital advertising and Amazon. I'm not sure how much the needle will be moved at Mastercard with this acquisition, because it is comparatively small and so it's not going to add much. But what I found fascinating was if you go and look at the press release from Mastercard announcing this deal. They talk about, it's not expected to be incrementally dilutive to the business for at least 2-plus years. I'm used to companies talking about acquisitions being accretive, not dilutive, so that was odd to me.

But the other -- I'm going to call this the online dating profile of corporate press releases, because there is all of these testimonials, you know, Bank of America comes -- this is a press release from Mastercard, by the way, this is the official press release from the company making the acquisition. They have a quote from Bank of America talking about how great both Finicity and Mastercard are and how great they're going to be together, they've got another quote from the president of investments at Rocket Mortgage, there's another one from some company called Brex, there's another one from the CEO of Experian North America. And I'm like, wait a minute, is this the dust jacket for a book that we're getting a press tour, like, why are you getting [laughs] all of these external people singing your praises; I don't think I've ever seen that before. And especially for an acquisition that's, I think, probably going to -- at the end of the day, probably not be much to notice for Mastercard, the giant corporate entity. So, it provided a moment of levity for me this morning as I was reading the press release.

Hill: And for anyone listening who is wondering which one of the two of us is mispronouncing the name of this company, it's me, and I apologize for what. It is Finicity, not "fin city" as I announced when I introduced the story. But, you know, you're right, Mastercard is a $310 billion company. They can afford this. They went through their sofa, they found some pocket change and they went out and they bought this company. But there is something to this that makes me wonder, not if there's something nefarious at play or some sort of conspiracy, but if, in fact, this is one of those acquisitions that a huge company makes so that a competitor doesn't make it.

So, that's like, look, we don't love this company. We think there's a 1 in 3 chance it eventually does become accretive to our business, but we don't want Visa buying these guys, so we're going to buy them.

Gillies: Yeah, I think that's a good interpretation. Again, I'm used to acquisitions -- look, we all know acquisitions that are dilutive to companies, [laughs] OK, but usually don't say it in the press release, usually this kind of happens because you screwed up on price. This one, it's kind of like, "Yeah, it's not going to be dilutive until two more years." OK, that's interesting. Thanks for telling us.

Hill: We'll see how it goes. Last week it was Burger King, this week it is Starbucks that is adding an Impossible sausage breakfast sandwich to its menu in U.S. locations. Interesting to see how this announcement is not really moving the needle for Starbucks. It is having an impact on shares of Beyond Meat, because Impossible Foods is a competitor to Beyond Meat. And Beyond Meat shares down about 4%. That's the stock reaction, but I think you and I both had the same reaction when we saw this headline.

Gillies: Well, I've got a bunch of thoughts about Starbucks. I'll start with I think where you're going here, Chris. Starbucks and food, have they ever gotten it right? Like, look, if I want a plastic-wrapped sandwich that was made for me three months ago in a factory and reheated, so it's still cold in the middle and searing hot on the edges, I can get that of Starbucks. I'm not a huge fan of the food there. I am a fan of the coffee, and I'm a stockholder and I'm of a fan of everybody getting the $7, you know, drinks with 700 calories in them, but I can already get the Beyond Meat sausage breakfast sandwich here in Canada. So, I might try this one just because I've actually never had an Impossible burger or the Impossible -- I've had Beyond Meat. And generally, but I mean, you can get an A&W, you can get the Beyond Burger and the Beyond Breakfast Sausage. Tim Hortons here had the Beyond Meat breakfast Sausage Sandwich and it was a colossal failure and they discontinued it within about three months, I believe.

What's interesting to me, as well, associated with this is, this is again, the continued rollout of the plant-based meat movement. They recognize, I think, everyone involved in Impossible, Beyond, Maple Leaf Foods here in Canada, has what they call their Lightlife offering, which is perfectly acceptable as well. I think they all realize, there's nothing really that different about these things that is spectacular.

Like, I mean, look, when you go have a breakfast sausage sandwich anywhere, that's just a regular breakfast sausage, you don't worry too much about who makes the sausage, you know. Oh, I'm getting Schneider's Farm sausage at a mass-produced, you know, at a McDonald's or, you know, pick your favorite breakfast joint. So that's one thing that I find interesting is we're now having, you know, the branding wars, Beyond Meat, Impossible Burger, having branding wars with an ingredient that we never really thought much about when it was just plain old sausage, plain old meat. And that's, I think, an attempt to upscale it, but I'm not sure how well that's going to work to be honest with you. Because at the end of the day, if we are accepting of plant-based meats, and I am, for whatever it's worth, I'm a fan. But they're not appreciably healthier than traditional meat. You know, they are very high fat, they are quite often -- they're very sausage-like in terms of -- you know, which can be fine from time to time, but you know, it's not exactly health food.

So, I find it interesting that we're now trying to brand what's in our breakfast sandwiches. And ironically, I think that the more success they have with getting people to accept plant-based meat, the less valuable the brands will become. And I mentioned earlier the Maple Leaf Foods in Canada has their Lightlife product, which is a good burger, they also have a rather strange -- and they have a breakfast as well -- they have a very strange offering, they're now offering 50:50, so it's half beef and half pork or sausage and half plant-based protein, which is one of the odder products I've seen. I'm not too sure [laughs] I like that too much.

But you know, we're looking to reduce meat consumption for various reasons, health, environmental reasons, that sort of thing. I probably tried this once and then -- I imagine it will fit in with my, and I suspect, your opinions about Starbucks and their food offerings, and that would be nothing to write home about and I probably will choose it as often as I choose their other breakfast sandwiches.

Hill: I'm going to give this one a shot, just like last year when Dunkin' Donuts came out with their breakfast sandwich to be sort of the Beyond breakfast sandwich, whatever it was called. And, obviously, there was a partnership with Beyond Meat there. I'll give this one a shot, see how it goes.

Like you, my first reaction was, "Wow! They're still trying with the food." And you know what, that's good, I don't want them to just give up. Average ticket price is such an important metric for any retailer, any restaurant. And so, if this can help, I'm all for it. But given the overwhelming evidence over the past 20 years in terms of Starbucks -- you know, earlier in the show you were asking, what is eMarketer's track record when it comes to predicting ad spend forecast? Let's just say it's better than Starbucks' track record when it comes to food products.

Gillies: Indeed. And, look, I mean these -- again, I'm a fan of the products, in general; the concept of plant-based meat. And I mentioned earlier that I'm not sure anyone really has anything that's like, this is the secret sauce -- pardon the pun, I suppose. But it's really a distribution story. And like, Beyond Meat is now everywhere. I think they've realized that, hey, our pea protein in a canola-based matrix is probably close enough to everyone else's, so the way we win this new battlefront is we outcompete people in terms of distribution, you know, deals with the various fast-food joints, deals with the various grocery stores. I was through Costco the other day and for the first time I saw, you know, a Costco-sized package of Beyond Meat burgers, I think it was eight for $20. Which is fair, slightly better than the two for $8 that you see at most grocery stores.

So, I think that it's about winning the distribution war. And because it's the big two, of course, Starbucks and Impossible and Maple Leaf, I guess, that's the third. You know, it's about Starbucks being part of the next front. But like I said, they've already got Beyond offerings, at least here, now they're going to have Impossible. I mean, at some point they'll probably just going to decide on one, you know, and whichever one tastes better and however they choose, but it's very interesting to me to see this ongoing battle. And, of course, with Beyond Meat stock being as richly valued as they are, you know, that's why you're seeing, I think, a little bit, you know, oh, Starbucks didn't pick us. Well, everyone else has, so I think you're OK.

Hill: Jim Gillies, thanks for being here.

Gillies: Thank you.

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd, I'm Chris Hill, thanks for listening, we'll see you tomorrow.