POV: Q2 2017 Earnings
The biggest digital media owners have been posting their Q2 earnings. For Facebook and Google, it was a story of continued growth and expanding opportunities, whilst Twitter hit a rough patch.
Google’s stock price has been riding near an all-time high, but with a solid, if not quite stellar, earnings’ announcement Alphabet stock took a tumble. Investors responded to the continuing decline in Google’s cost per click, driven by continued consumer migration to mobile, but seemed to ignore Google’s continued growth of revenue per click. Essentially Google is making up in volume what it is losing on an individual unit. Recent decisions by major advertisers to pull investment from Google (YouTube) due to brand safety concerns did not impact earnings. What did impact profit was the potential $2.7bn fine levied by European Regulators, which restricted profits to a $3.5bn. If Google chooses to respond to declining CPC, expect it to continue exploring new mobile ad units for YouTube and search to try to reverse the erosion.
Facebook has been warning investors that growth would be slowing this year, but so far the company doesn’t seem to have slowed down much; with over 2bn monthly active users (MAU), Facebook continues to print money. Revenue, earnings and profit were up over most analyst expectations (revenue of $9.3bn (+48% YoY) or $1.32/share and $3.8bn in profit (+71% YoY). The question is: Can Facebook continue to grow as ad loads top out, more and more dollars flow to (lower CPC) mobile and Facebook’s future expansion hinges on places with less developed ad markets like Africa and Asia? We think the future is bright as Facebook invests in expanding the advertising opportunities behind it’s video offering with longer form content and its Live product, and explores new ad products in “off Facebook” properties like Messenger, Instagram and potentially WhatsApp. We expect to see lots of innovation (and subsequent growth) in these places versus “Facebook proper”.
Despite a strong start to the year and better than expected earnings per share this quarter ($0.12, $0.05 better than expected), Twitter’s flat user growth versus previous quarter and decreased ad revenue (-8%) was not well received by the market with shares immediately falling 13%. To jumpstart growth and re-attract ad dollars Twitter is focusing on three things: 1) development of a “lite” version of Twitter more suited to the emerging world where mobile speeds are slower and data more expensive, 2) further investment in its video product to be more ‘TV like’, striking deals with multiple publishers to create original content and 3) cracking down on abuse and harassment on the platform. The next 3-6 months will be pivotal for the company.
Google and Facebook continue to race along in high gear, whilst Twitter seems stuck in neutral. However, all three companies appear to have in place strategies that, at least on paper, address their vulnerabilities and may contribute to greater growth.