(Bloomberg Opinion) -- Earlier this year, as the pandemic wreaked havoc on the economy, Facebook Inc., Alphabet Inc.’s Google and other big players in digital-advertising were bracing for a prolonged slump in the industry. It’s clear now that many of their worst fears haven’t come to pass. Marketers began spending again after governments relaxed lockdown orders and economies stabilized. But with elevated valuations already baking in expectations for a rebound and a surge in Covid-19 cases now threatening to stunt the recovery, investors might want to take a moment to stop and assess.
We will get a clearer picture of the online ad market’s condition later this week when Facebook, Alphabet and Twitter Inc. report results after the close of trading on Thursday. But let’s look at what we’ve learned so far from other companies this earnings season.
Anecdotal evidence from earnings calls points to an improved economic environment, at least until lately. Verizon Communications Inc. CEO Hans Vestberg said last week he saw high levels of business activity among the wireless carrier’s large corporate customers. In addition, two major semiconductor suppliers — Texas Instruments Inc. and Xilinx Inc. — cited stronger-than-expected demand from the auto sector in their calls with investors. This all bodes well for ad spending, assuming the brighter outlook is sustained.
Snap Inc.’s blockbuster earnings last week provided perhaps the strongest evidence of a rebound. The social media company beat the consensus sales estimate for its September quarter by more than 20%, with management saying many of the headwinds they expected didn’t materialize. Corporate advertisers surprisingly resumed brand-oriented marketing initiatives, a very positive sign. But Snap’s impressive performance also reflects the success of unique advertising products that have helped set it apart from its peers. These include new ad formats that can directly lead users to online sales and app downloads, as well as augmented-reality offerings that enable users to virtually try out products inside the Snapchat app. Larger rivals haven’t been able to match this type of innovation and likely won’t turn in the same kind of outperformance, even if they exceed expectations.
Out of Big Tech, Facebook has done the best in expanding its offerings into the right areas. Recently, the social media giant has been aggressively moving into the e-commerce space. In May, the company signed a partnership with Shopify Inc. to expand its Facebook Shops initiative, enabling small businesses to easily create online stores on both Facebook and Instagram. Last week, it also announced plans to charge for new commerce-related services for businesses inside WhatsApp. This is a big deal because it represents Facebook’s first concrete step to monetize this messaging platform, which has more than two billion users. With consumer shopping behavior permanently shifting online, these moves should pay off.
Google and Twitter have been less innovative, and it may show in their results. A healthier advertising market will help Google’s search ad revenue and Twitter’s more brand-oriented ads, but the two companies haven’t offered anything dramatically new or different that could spur another leg higher on growth. In some ways, Google’s search dominance may have left it with fewer additional areas to conquer. And I’ve repeatedly written about Twitter’s lackluster track record in keeping up and matching the competition’s latest ad platform technologies and features. Despite Twitter’s stock recent rise, I have seen nothing to change that assessment.
Where does this leave investors heading into earnings? The news may well be positive — the ad business does seem to have held up better than expected — but the industry’s higher valuations depend on continued business momentum. New Covid-19 outbreaks, unknowns surrounding the presidential election and a lack of fresh fiscal stimulus all cloud the view, not to mention a toughening regulatory landscape. Even with its strong results, Snap declined to give official fourth-quarter guidance, citing the uncertainty over the holiday season and the continuing pandemic.
If business trends do worsen, it may be a larger issue for Google and Twitter. Facebook and Snap should be more insulated, with their latest services and tools allowing them to keep riding the tailwind of e-commerce. Either way, the big wins may be harder and harder to score.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tae Kim is a Bloomberg Opinion columnist covering technology. He previously covered technology for Barron's, following an earlier career as an equity analyst.
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