While Google and Facebook—the titans of ad-dependent media—dominate the U.S. digital advertising landscape, investors may be overly optimistic about their prospects.
Consensus projections are pricing in years of steep revenue gains that may not occur.
I am hosting a special institutional call tomorrow, Wednesday, February 7 at 10:00am ET to discuss both companies.
Email sales@hedgeye.com for more info.
some HIGHLIGHTS
- Why Investors Remain Bullish. Whether in terms of price, expert consensus, or earnings multiple, the market holds Google and Facebook in high regard. These tech juggernauts are unlike any other stocks on the market.
- What Investors Expect. Consensus revenue projections imply that Google and Facebook will be able to keep profit margins high while growing their market share indefinitely. But is this feasible?
- Why the Bulls Are Wrong. For these firms to hit their consensus projections, at least one of three things must happen by 2021: Google and Facebook must utterly destroy their digital competitors; digital advertising must gobble up three-quarters of all advertising; or total advertising must double as a share of GDP. None of the above are likely—nor is any combination that would satisfy the consensus.
- Counterarguments… Countered. To get future revenues “back to consensus,” the bulls issue three counterclaims: first, that revenue growth abroad (ex-U.S.) will accelerate; second, that we still start seeing game-changing revenue growth outside of ads; and third, that these firms will benefit from the twilight of net neutrality and ultimately “own the Web.” We find these claims unpersuasive.
- How Things Could Get Even Worse for Google and Facebook. There are several scenarios in which the future for these firms may be even dimmer than we project. Their margins could shrink, the U.S. ad landscape could crater, the consumer tech-lash against digital could intensify, or the political outlook both at home and abroad could darken. All are very distinct threats to the consensus outlook.
- The Final Word. We offer our bottom-line on how investors should regard these stocks.
