Digital advertising giants Alphabet Inc. (GOOGL) and Facebook Inc. (FB), thought to have limited growth because of their giant market shares, are now poised for dramatic gains in a market that's much bigger than expected. According to Morgan Stanley, this bigger than expected surge in the two tech giants’ bread-and-butter businesses cold sharply boost their earnings and stock prices, per Barron’s.
While the Google-Facebook duopoly controls more than half of the digital ad market, they are nowhere near topping out, per Morgan Stanley analyst Brian Nowak. He estimates the online penetration of traditional advertising at 25%, half of his previous estimate at 50%. This massive opportunity for more business is part of a handful of factors that could bolster results for the leading industry players, even as rival such as Snap Inc. (SNAP), Twitter Inc. (TWTR) and Amazon.com Inc. (AMZN) aggressively push into the market. Google and Facebook, which dominate 50-60% of the digital ad space, are “still driving 80%+ of incremental online ad growth and we don’t see that changing,” noted Nowak.
(Online Advertising Penetration)
Source: Morgan Stanley
The $1 trillion online advertising business is currently controlled by search giant Google, with a percentage share in the high 30s, followed by social media pioneer Facebook, with a market share in the low 20s.
Nowak rates Alphabet at overweight, expecting shares to gain 30% over 12 months to reach $1,500. Alongside continued strength in Google’s search business, the analyst cites positive drivers such as the monetization of Google Maps, recent success with TrueView for Action ads, and YouTube’s growing user base of nearly 2 billion.
Morgan Stanley also rates Facebook at outperform, with a $190 price target implying an 11.8% upside. Nowak views “Stories” as a cash cow for the company, now used by more than 1.25 billion over platforms Instagram, WhatsApp and core Facebook.
As for Snap, a relatively new player compared to the duopoly leaders, Nowak cites improvements in the company’s products as a factor luring more ad buyers in. Snap shares have fallen over 46% in 12 months as investors react to disappointing user numbers and fierce competition from Instagram, which continues to look more like Snapchat.
Nowak is upbeat regarding Snap’s new commercial-ad units, which he says are successfully growing revenue at a quicker pace, a recently launched Android app seen as driving user growth, and the redesign of the Snap app, adding better curation and personalization. According to research from eMarketer, Snap’s world-wide ad revenue is slated to grow 45% YOY to reach $1.53 billion in 2019.
It’s important to note that Morgan Stanley's thesis goes counter to the overwhelming majority of analysts who see Google-Facebook losing share to Amazon and others. While the massive size of the market opportunity for the Google-Facebook duopoly could boost results for the companies, some bearish analysts have warned against significant market losses for the behemoths in the not-so-long-term. According to eMarketer, the combined share of Google-Facebook will fall in 2019 even as ad revenues grow, per Ad Age.
Meanwhile, Amazon is slated to grow its emerging U.S. ad business by over 50% in 2019, boosting its share of the digital ad market to 8.8% by year-end and 10% by 2020, up from 4% last year. Unlike Google and Facebook, which rely heavily on their advertising revenue, Amazon is equipped with its dominant AWS cloud platform and retail powerhouse, enabling it to spend its ample cash on hand to double down on growth opportunities.
“Amazon has a major benefit to advertisers, especially consumer-packaged goods and direct-to-consumer brands,” said eMarketer forecasting director Monica Peart in an interview with Barron’s. “The platform is rich with shoppers’ behavioral data for targeting and provides access to purchase data in real-time. And as Amazon has extended its reach, consumers increasingly trust it when shopping.”
Given the sheer size of behemoths such as Google and Facebook, they are typically able to grow even bigger, unless they are held back by regulations or broken up by antitrust. While these outcomes remain in the realm of possibility, the tech giants, despite their domineering force, could still be risky investments.
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