Regulators May Pose A Bigger Threat To Comms Than COVID-19

Alphabet Inc GOOG GOOGL, Twitter Inc TWTR and Facebook, Inc. FB have changed our everyday life for good. Besides its enormous ecosystem, Alphabet's Google is indisputably the most popular search engine across the globe. Twitter's platform has become a soapbox for politicians, celebrities, and journalists. With their tweets, it became the source of real-time news. Facebook dominates generalized social media in the U.S. but it has not unseated Twitter in the microblogging universe. All three have dealt with positives in engagement and negatives in reduced ad spending during the pandemic. But the bottom line is each of these stocks has been pandemic-resilient.

Facebook

With a market cap of $700 billion, Facebook remains the 800-pound gorilla that is several multiples larger than Twitter, Pinterest Inc PINS, and Snap Inc SNAP combined. Its umbrella of sites hosts 2.7 billion monthly active users, with 1.79 billion of them engaging daily. To further growth, Facebook gained a first-mover advantage in VR. The 40% year-over-year increase in non-ad revenue in the second quarter confirms Facebook has capitalized on this lead. Facebook just announced its Messenger API has also been updated to allow businesses to manage their communications across Instagram, in addition to Messenger. Businesses using the API can also manage their Instagram presence, including their Profile, Shops and Stories, proving Facebook has also done a good job in catching the e-commerce wave.

Alphabet

Alphabet's stock has risen nearly 30% over the past 12 months. Alphabet's revenue rose 18% to $161.9 billion last year. Google's ad revenue expanded 16% with non-ad revenue increasing by 21% but the ultimate winner being Google Cloud's revenue that skyrocketed 53%. But during the first half of the year, that image was significantly altered. Alphabet's revenue rose merely 6% year-over-year as it amounted to $79.5 billion. Google's ad revenue grew less than 1% as ad spending was hampered by the pandemic. But, Google Cloud's revenue surged 47% and even Google's non-ad revenue expanded 24%.

Wall Street expects Alphabet's revenue to rise 7% this year with a decline of 10% in earnings. But analysts also expect its revenue and earnings to rise 21% and 28% next year, under the assumption of a rebound in ad spending and the end of the pandemic. But Google's antitrust challenges across the world remain, and they could significantly limit its ability to expand its ecosystems.

Twitter

Over the past 12 months, Twitter's stock rose by approximately 15%. Twitter generated 83% of its revenue from online ads in the first half of 2020, with the rest being generated by its "data licensing and other" business. But despite its popularity, Twitter has faced growth struggles as it must compete with Facebook, comparing to which is tiny in terms of market cap with its $31 billion.

Twitter's business model was quite exposed to the pandemic. Revenue shrank 19% compared to the same quarter last year, leading to a quarterly loss of $1.56 per diluted share. It's quite a difference compared to the $1.43 per share it earned one year ago.

Revenue rose 14% to $3.46 billion last year, with advertising revenue rising 14% due to demand in the U.S. and its data licensing and other revenue also rising 10%. But 2020 brought an entirely different picture. During the first half of the year, revenue fell 8% YoY to $1.49 billion. Ad revenue dropped 12% as corporations needed to cut on ad spending. The drop has offset the 11% growth of its data licensing and other business segment. The operating margin turned negative and resulted in a net loss of $1.39 billion which is quite different from last year's profit of $1.31 billion for the same period.

Analysts expect Twitter's revenue to decline 5% this year and its earnings to stay in the red. But if the pandemic ends next year, revenue is expected to rebound 24% with a full-year profit. The slowdown could be short-lived but as the upcoming U.S. election could also bring more users to Twitter, despite the fact the platform banned political ads.

Outlook – The Regulatory Barrier

Facebook, Alphabet, and Twitter once again find themselves on the target of regulators. They seem to find themselves in the crosshairs of regulators, both in the U.S. and abroad, over and over again. They are constantly being criticized regarding antitrust and privacy issues. Although Big Tech has already proven its mighty power, hefty fines and new protocols could be costly and, consequently, erode profit margins. More importantly, being closely watched upon can hamper their growth prospects.

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