Facebook and Google Are More Exposed to the Coronavirus Than You Think

Both tech giants could struggle with lower ad revenue as a global recession hits.

Facebook (NASDAQ:FB) and Alphabet‘s (NASDAQ:GOOG) (NASDAQ:GOOGL) Google might initially seem resistant to the novel coronavirus pandemic. After all, both companies generate most of their revenue from ads, aren’t exposed to supply chain disruptions, and could continue operating as their employees worked from home.

However, the COVID-19 crisis could still exploit both companies’ key weaknesses and cause significant slowdowns in their core ad businesses. Let’s examine the risks to see if Facebook and Alphabet can withstand the incoming headwinds.

Facebook and Google are both exposed to China

Facebook was banned in mainland China in 2009 after the Urumqi riots. Google exited the country in 2010 after clashing with the government over alleged cyberattacks. Yet both companies still generate billions of dollars in annual revenue from Chinese advertisers trying to reach overseas customers.

Pivotal Research analyst Brian Weiser estimates Facebook generated $5 billion to $7 billion in sales from Chinese advertisers in fiscal 2018, which equaled roughly 10% of its total revenue. The Information estimated that Google generated about $3 billion in ad revenue from the “Greater China” area (including Hong Kong, Macau, and Taiwan) in 2018, which would account for about 2% of Alphabet’s revenue.

Neither company offers clear disclosures regarding China. In their latest 10-K filings, Facebook admitted to generating “meaningful revenue from a limited number of resellers representing advertisers based in China,” while Alphabet didn’t mention the country at all.

China’s coronavirus infection rates are decelerating and many businesses are reopening. However, those companies will likely dial back their ad spending and focus on domestic ad platforms — including Baidu, Tencent‘s WeChat, Weibo, and ByteDance‘s Douyin (TikTok) or Toutiao — instead of Facebook and Google. That shift could throttle both companies’ ad revenue this year.

Read more: https://www.fool.com/investing/2020/03/13/facebook-google-more-exposed-to-coronavirus.aspx