NEW YORK — To little surprise, the biggest of the digital media darlings that have captivated the hearts of consumers and marketers are at little risk of a financial meltdown.
But, are Google and Facebook perhaps overheated?
That’s a question Pivotal Research Group analyst Brian Wieser sought to answer, and his analysis, released Tuesday (7/11), suggests these two behemoths of social media presently have “heightened downside risks.”
Ahead of the Q2 2017 earnings releases for the Fantastic Four of the digital world — Facebook, Google-parent Alphabet, Snap and Twitter — all is well on an overall basis, Wieser notes.
“We are only making minor tweaks to our models for Facebook, Alphabet, Snap and Twitter,” he says.
It’s what he says immediately after this statement that’s perhaps eye-catching, as there will be “a range of broader industry trends mostly impacting Google and Facebook.”
Wieser’s view on Snap is unchanged; that’s not necessarily good news for the parent of Snapchat.
Meanwhile, Twitter is being looked at more favorably.
Why would there be bad news for Google? Look to Brussels for an answer.
The European Commission recently handed Google a $2.7 billion USD fine for the company’s practices tied to its Shopping product. Wieser notes it is “only one of Google’s problems in the region.”
Thus, he opines, “Changes to the company’s practices — left ambiguously for Google to solve, or else face another fine — may hurt revenue growth. This, plus the fine, cause us to reduce our price target on Alphabet slightly, to $980 vs. $990 previously.”
Other investigations — including separate ones focused on AdWords and Android — could lead to more fines and changes to business practices, which could further reduce growth.
“We don’t see the EC letting up any time soon,” Wieser says.
Also a possible limit to not only Google, but to Facebook, are the EU’s new data privacy regulation rules, set to become law across member nations in May 2018.
Closer to home, “brand safety issues” regarding Google and advertisers is a lingering problem.
Wieser says, “It seems clear that Google has not fully recovered from the brand safety episode [that] started earlier this year. While investors may never be able to identify its near-term impact given a lack of disclosures from the company, a bigger concern is that Google executives must spend their time with marketers explaining their approach to brand safety rather than upselling on using Google ad products more strategically. It appears to us that solutions will require more humans (rather than the machines Google prefers), and consequently we don’t think this issue will go away any time soon.”
Then, there is the ongoing concern regarding accurate measurement of digital media consumption. This is where Facebook is challenged.
“While every digital media owner has issues with fully supporting third party measurement tools and with viewability, these issues appear to be relatively more pronounced for Facebook based on events from the past year,” Wieser says. “Although Facebook is making progress in providing better access to third parties to provide independent measurement, viewability problems won’t go away, especially as advertisers raise standards on this metric.”
Even so, Facebook is not without upside potential.
“We think that Instagram continues to provide a source of growth, and both Messenger and WhatsApp offer longer-term optionality,” Wieser says.
THIRD FORCE IN THE WINGS?
Given the issues at Facebook and Alphabet’s Google with regard to advertising, will a “third force” impact Google and Facebook in a meaningful way?
“Advertisers certainly want one to,” Wieser says.
“Verizon’s Oath, including AOL (as well as the Microsoft inventory it represents) and Yahoo!, has a chance to compete for broad reaching brand-focused ad sales within the U.S., although doing so requires successful integration of Yahoo into Verizon along with sustained investment,” he notes.
Could it be Amazon?
“If anything, it’s different than a direct substitute for Google and Facebook,”Wieser says. “It’s a cliché by now, but no less real to note that the ‘sleeping giant’ that is Amazon could become much more meaningful than it already is.”
But what about Snap and Twitter?
“While we’re still negative on Snap as a stock at current valuation levels (we value it at $9), the company appears to be doing reasonably well in terms of usage,” Wieser notes. “There are many devoted advertisers who will support its growth, especially the film studios.”
While Pivotal’s Snap view is unchanged, the financial house is “increasingly positive” about Twitter, President Trump’s favorite form of direct-to-constituent communication.
“The company will probably struggle to grow during 2017, but we think it has mostly cycled through the spending they generated from advertisers who bought Twitter inventory as a ‘bright, shiny, object,’ rather than spending to meet specific advertiser needs which Twitter can uniquely satisfy,” Wieser says. “Reinforcing this view, we hear increasingly positive (or non-negative) comments about the company from industry contacts. We are not changing our operating expectations for Twitter right now, but we are eliminating a negative sentiment-related variable in our cost of capital, bringing this figure more in line with internet-centric peers.”
This change increases Pivotal’s Twitter target to $17, vs. $15 previously.
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