A banner for the online image board Pinterest Inc. hangs from the New York Stock Exchange on the morning that Pinterest makes its initial public offering on April 18, 2019.
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Third-quarter earnings by tech giants like Facebook, Google, Snap, Twitter, Pinterest and Amazon showed that digital ad revenue came roaring back in recent months, and suggested some of the digital ad trends tied to the explosion of e-commerce could be here to stay.
Morgan Stanley analysts wrote in the note that ad beats in the third quarter speak to the initial impact of a “V-shaped recovery” into next year. In the third-quarter, online ad companies saw the results of surging e-commerce ad spend and a return of brand advertising, which had been a harder-hit part of the market during the pandemic.
“Big picture, we continue to view advertising as being cyclical and see faster GDP growth leading to more ad spend across more industries … as companies spend to reach the recovering/re-opening consumer,” analysts said in the note.
Morgan Stanley said the consumer behavior changes due to stay-at-home orders have sped up the desire to experiment and shift advertising spend toward digital. Morgan Stanley raised its 2020 and 2021 ad forecasts by 8% and 15%, respectively, expecting 11% year-over-year growth in 2020 and 20% year-over-year growth in 2021.
A number of factors are at play in the online ad market as the sector recovers: Morgan Stanley analysts said online travel related spend in 2019 represented 8% of the digital ad market, or 2% of total ecommerce, falling by 50% in 2020. The analysts expect that to recover in the next two years.
Analysts forecast a 29% year-over-year ad growth for Facebook during the fourth quarter and 27% growth in 2021, ahead of street estimates. But they said those forecasts don’t incorporate any contribution from Instagram Shops or Reels, two products that could “add hundreds of millions of dollars of ad revenue” next year.
Analysts expect Google to see a recovery in travel-related paid search, while YouTube in 2021 could see the benefit of a stronger direct response offering and a more stable brand advertising market.
Meanwhile, Morgan Stanley said Pinterest’s automated bidding will be a tailwind through the “shelter-in holiday” and into next year, amid other product innovations. They said at least a third of Pinterest’s ad revenue earlier this year was pure brand ad spend. That means the company is likely to reap the benefits as the broader brand market improves, and should also see more spend on the direct response side as it builds out its performance marketing tools.
CNBC’s Michael Bloom contributed reporting.