The Afternoon Audit
Wednesday | 4.29.2020

Catch Up Quick: Mixed Pandemic Sentiment

The Good News

• Dr. Anthony Fauci says Gilead’s remdesivir will set a new ‘standard of care’ for coronavirus treatment after positive results from a drug trial testing

• Oxford University scientists are planning vaccine tests with over 6,000 people by the end of June

The Bad News

• U.S. latest: Economy shrinks at annualized 4.8% in first quarter

• Lyft lays off 17% of its workforce while Boeing cuts 10%

• 89% of Americans, both Republicans and Democrats, worry about economic collapse

• The US is not even ‘remotely’ ready to re-open for business, says outbreak preparedness expert Jeremy Konyndyk of the Center for Global Development

• The "sharing economy" — embodied by Uber, Airbnb and WeWork — is in critical condition

• Southwest expects revenue in May to fall as much as 95% from a year earlier

Important Earnings Releases

• Facebook shares rise over 9% in after-hours trading on Wednesday after the company announced Q1 results

• Tesla shares rose more than 5% after-hours after its third consecutively profitable quarter

• Microsoft shares rose in extended trading after fiscal Q3 sales growth of 15%, fueled by its cloud business

• Alphabet's stock jumped rocketed after hours on Tuesday following its earnings report that showed an “abrupt” decline in ad revenues in March that did not worsen in April

A Deeper Dive Into Google & Facebook's Ad Revenue

Ad Business Overview

• Many large technology companies make a vast majority of revenue through advertising

• Given high volumes of traffic, small businesses will pay companies such as Facebook and Google to advertise on their platforms

Recent Ad Revenue Trends

• Both Facebook and Google reported a steep drop off in ad revenue in March

• For the month of April, Google and Facebook reported stabilizing ad revenue

• At first glance, this may seem backwards given:

  • A larger percentage of the world was shut down during in April than in March

  • Small businesses barely have enough cash to maintain payroll, much less advertise

• How come ad revenue didn't worsen in April?

Understanding the Trend

• Note the cost structure of the online ad business

  • Companies using Facebook and Google to advertise typically pay per the amount of clicks that their ad receives

• Therefore, from Google & Facebooks's perspective, two main components drive ad revenue

  • 1) The number of small businesses advertising

  • 2) The number of clicks or impressions the advertisements get by users

• In March, fewer businesses were advertising, and, since the world was still in the process of shutting down, the amount of users clicking on ads was closer to average

  • Therefore, ad revenue was hit hard

• In April, fewer small businesses were advertising, but a huge spike in traffic due to concrete world wide shut down greatly boosted the number of users online, clicking on ads

  • Therefore, this offset the fewer number of small businesses advertising

• This explains why both tech giants saw ad revenue drop off in March and rebound in April

The Bottom Line

• Just because we hear of ad revenue stabilizing in April, doesn't mean that small businesses are in financial shape to spend on ads again

  • It just means that more people are bored at home, spending time online