In a research note Monday, Atlantic Equities analyst James Cordwell considered how the two dominant players in online advertising would fare in an economic downturn. He thinks both companies could see 2020 ad revenue growth fall into the low double digits, well below his current estimates of 17% for Alphabet and 20% for Facebook.
And he sees risks to the stocks if the market prices in a recession, saying Alphabet (ticker: GOOG) could go as low as $1,000, while Facebook (FB) could hit $140. Facebook was down 5.4% to $171.29 in morning trading, while Alphabet had fallen 5.2% to $1,228.08.
That said, Cordwell has Overweight ratings on both stocks. He advised investors to “capitalize on any such weakness given the companies’ financial strength and potential for a downturn to increase secular tailwinds.”
Cordwell noted that ad spending fell 5% in the 2001 recession and 10% in the 2009 downturn. He thinks the ad-market decline this time is likely to be in the low single digits, on the theory that the recession (if we get one) isn’t likely to be as severe as the 2007-09 recession, while the ad market isn’t as overheated as it was during the internet bubble years.
The 2009 recession, he noted, reinforced secular trends, “suggesting Alphabet and Facebook would continue to take share through a downturn, while TV could be impacted in the same way newspapers were 12 years ago.”
Search ads, now about 73% of revenues, would be the most resilient ad format for Alphabet in a recession, he says. He sees a retreat to 12% growth from his current base case of 17%. But he thinks YouTube’s growth could slow considerably: He models 14% growth in a recession, down from his current forecast of 29%.
For Facebook, he sees economic sensitivity as higher than for search ads but less than for YouTube. In a recession, he expects 12% growth, which compares to his current estimate of 20%. In a downturn, he estimates $8.15 in EPS this year and $9.66 next year, versus his current estimates of $9.08 this year and $10.61 next year.
“Given the still significant uncertainty as to whether we will see a recession, we continue to view both stocks as attractive, given ~10% downside should a recession emerge and 25%+ upside if it doesn’t,” Cordwell wrote.
Write to Eric J. Savitz at firstname.lastname@example.org
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