Two weeks ago we found something disturbing for social media companies: according to a new study, social media usage around the globe had tumbled. This included not just Twitter, but also Instagram, Snapchat and surprisingly, Facebook. Specifically, Facebook’s Instagram saw the biggest year-over-year drop: usage was down 23.7% this year, closely followed by Twitter (down 23.4%), Snapchat (down 15.7%), and Facebook, while down the least, still saw a notable 8% decline in usage.
Now, according to a new channel check released by Citi’s Mark May, it appears that online users are not just turning gradually away from social media, but from legacy architecture in general, in this case Google search. Read on:
We recently conducted checks with two leading search engine marketing (SEM) agencies/platforms, which in aggregate have visibility into ~$5 billion in annual search spending (the vast majority of which, of course, is on Google). At a high level, these early data points suggest that a slight deceleration in the y/y growth rate for search marketing spend in 2Q16 vs. 1Q16 is possible. This could be slightly below current forecasts, though how to interpret the data and what to compare it with is sometimes up for debate. For instance, our and consensus estimates are for ~18% y/y growth in net revenue (vs. 18% in 1Q16), which is slightly better than these early datapoints would suggest. That said, on an FX-neutral basis, our and consensus forecasts for 2Q16 call for a deceleration in y/y growth on a tougher comp (e.g., ~23% y/y growth in FX-neutral Websites gross revenue vs. 26% in 1Q16, with only a ~100bps tougher comp). This assumed modest rate of FX-neutral growth deceleration is more consistent with the check with the most highly correlated SEM, which is currently pacing at a ~200bps sequential deceleration in its client’s y/y spending growth rate on Google (i.e., from 25% in 1Q16 to 23% in 2Q16).
In short, these are only two checks, and they don’t include all of June, but they can be interpreted by some as mixed or even as slightly disappointing relative to current forecasts. Our current view is that based on these datapoints we would not currently be expecting upside to our 2Q16 forecasts for Google’s search business and there is a possibility that – like in 1Q16 – that 2Q16 gross revenue could again come in 1-2% below expectations. Moreover, as discussed in our most recent YouTube Tracker report (here), YouTube’s growth might also be slowing in 2Q16 as it faces more difficult y/y comps. Lastly, from a Websites search TAC perspective, we believe that there is unlikely to be another disappointment like in 1Q16, as expectations appear generally fair (see our recent report titled Unpacking TAC).
As far as the stock, while revenue results in 2Q16 have the potential to come in modestly below expectations for the reasons cited above, we believe mgmt remains committed to expense and capital discipline and we view 2H16 and CY17 forecasts as reasonable. As such, we continue to view the valuation as attractive on an earnings multiple and PEG basis and maintain our Buy rating (and $900 target).
Other details from our checks include: 1) the trend of robust paid click growth offset by y/y declining in blended CPCs continue; 2) data suggests that Yahoo! may be ramping its use of Google search ads as part of the new agreement first announced last October; and 3) search marketers expect the recently announced Expanded Text Ads initiative to roll out more meaningfully in the Q3/Q4 timeframe and to have a meaningful impact on CTRs/paid click growth and, thus, monetization.
While the company has not commented on this finding, and certainly there is a while before Alphabet’s official numbers will confirm or deny a slowing in its Q2 growth rate, the market is not happy, and is dragging not just GOOG but FANGs lower.
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