Despite privacy scandals, Google and Facebook keep pulling in ad money

Google and Facebook earnings haven't slowed down off the back of privacy scandals. Photo/Getty Images.

Concerns over privacy and regulation aren't hurting Facebook and Google where it matters - their multibillion dollar advertising businesses.

As the internet giants prepare to report fourth-quarter earnings, most industry analysts say growing consumer spending and the continued march from in-store to online commerce will keep digital advertising growing. That's something investors are keen to see after a year of damaging headlines, congressional hearings and a painful share sell-off.

The big political and social questions surrounding Big Tech aren't going away. But advertisers from consumer goods giants to mom-and pop-businesses still see Google and Facebook as essential tools for reaching customers.

"Facebook is definitely the one that's caught the most blow-back," said Andy Taylor, associate director of research at online advertising agency Merkle. "But we really haven't seen a shift in advertiser attitude toward the platform."

Facebook's Instagram is doing particularly well. In the fourth quarter, ad dollars on Instagram surged 120 per cent from the same period in 2017, according to Kenshoo Ltd., which coordinates digital marketing spending for other companies.

"Our advertisers that have been on Instagram more than doubled their spend year over year," Merkle's Taylor said. "Instagram could prop up Facebook growth for quite a while."

Equity analysts estimate Facebook and Google will post record revenue in the fourth quarter, which encompasses the holiday season and e-commerce bonanza of Black Friday and Cyber Monday. More than half of marketing dollars spent in the U.S. last year went to digital ads, which Google and Facebook continue to dominate, Eric Sheridan, an analyst at UBS wrote in a recent note.

Facebook, which reports on Wednesday, will see sales surge 26 percent to $16.39 billion. Google parent Alphabet Inc. releases results Feb. 4 and is expected to expand revenue by 21 percent to $31.29 billion, according to analysts' estimate data compiled by Bloomberg.

"Broad-based global economic strength is producing very solid demand across all major digital ad platforms," Sheridan said.

Another winner will be Amazon.com Inc., which got into digital advertising much later than Facebook and Google but has been growing rapidly in the last two years.

"Advertising will undoubtedly continue to be the fastest growing and highest-margin business for Amazon for the foreseeable future," Ben Schachter, an analyst at Macquarie, said in a recent note. Amazon's "Other" division, which includes advertising, will see revenue jump 60 per cent to $16 billion in 2019, Schachter estimates.

That won't necessarily come at the expense of Google and Facebook though, said Merkle's Taylor. Instead, Amazon is luring marketing dollars away from more traditional media formats, as well as online comparison-shopping services that lost traction in recent years, he said.

Twitter is also expected to keep growing revenue at a solid clip as it gets better at selling video ads and advertisers see it as a viable place to diversify some of their spending. The average analyst estimate has the company reporting US$869.1 million in revenue, up 19 percent from a year earlier.

The big online ad platforms aren't completely out of the woods yet. User growth for Facebook's core app in the lucrative U.S. and European markets plateaued last year, and the company warned investors in July to expect slowing revenue growth and thinner margins, leading to a 20 per cent drop in market value that the company still hasn't recovered from.

Google has been able defy gravity by keeping ad growth above 20 per cent for years, but once it slips below that, the stock will take a hit, Macquarie's Schachter said. The internet giant will inevitably find itself competing against Amazon for only search dollars, he said.

"The rivalry between these two tech giants will continue to ramp throughout the year," Schachter said.

- Bloomberg