Robust Growth in the Digital Advertising Spending Worldwide
Total worldwide digital ad spending is on track to grow at rapid pace, and is estimated to reach a substantial level of USD375.8 billion by 2021. Digital ad spending is projected to leap in market share of all media ad spending, from approximately one-third (35.2%) in 2016 to almost half (49.6%) of all total media ad spending by 2021 (Chart 1). Across 2018, digital ad spending will continue to swell, increasing 16.5% to reach USD266.8 billion. Empowered by improving ad technology and expanding ad load (ratio of ad to other content), global digital media expenditure is projected to grow at double-digit figure each year till 2021.
(a) Rising Allocation Towards Mobile Ad Spending
Chart 1: Projected Digital Advertising Spending Worldwide
This growth in the digital advertising is primarily driven by the explosive growth in mobile ad revenue, attributed to the ever-growing number of smartphone users. In 2017, mobile ad spending totalled USD58.38 billion, accounting for 70.3% of digital ad and 28.5% of all media ad investment. This figure is expected to reach USD156 billion by 2019. This is due to advertisers concentrating more dollars on the mobile ad segment, as consumers continue to spend increasing amount of time on their mobile devices.
(b) Growing Number Of Smartphone Users Worldwide
Chart 2: Projected Number of Smartphone Users Worldwide, 2014-2020
At the heart of the digital ad growth is the growth in the number of smartphone users globally. The number of smartphone users is forecasted to grow at an annualised rate of 8.1% from 2.1 billion in 2016 to around 2.87 billion in 2020 (Chart 2). 36% of the world’s population is projected to own a smartphone in 2018, up from just about 10% in 2011. Mobile devices (smartphones and tablets) are now the primary means of accessing the internet for most users, and will account for 73% of time spent using the internet in 2018 (up from 65% in 2016).
This comes as the rest of the world – especially those of emerging markets – becomes more affluent, alongside an expanding middle class. In pursuit of these trends, businesses are starting to spend more and allocate higher advertising budgets in order to capture these markets. As a result, we believe that Alphabet and Facebook are well-positioned to further monetise its users from these high-growth markets.
(c) Digital Advertising Now The New Preferred Medium
Chart 3: Global Advertising Spending, by Medium, 1999-2018
As a whole, digital advertising is fast becoming the medium of choice for global media ad industry. In 2017 digital advertising finally surpassed traditional TV ad spending, reaching USD228.44 billion worldwide (41% of all media ad spending) compared to TV’s USD178 billion (35% of all media ad spending) (Chart 3). Alphabet and Facebook, as the dominant players in the digital ad industry, are well positioned to be the primary beneficiaries of the secular shift to digital ad spending by businesses.
Dominant Duopoly with Ever-growing User Base
Chart 4: Facebook’s Ad Revenue and Market Share in the Global Digital Ad Market 2010-18E
Chart 5: Alphabet’s Ad Revenue and Market Share in the Global Digital Ad Market 2012-18E
Alphabet and Facebook have thrived well in the digital advertising sector over the past few years. Facebook’s market share has seen a meteoric rise from 6.8% in 2013 to about 23% in 2018 (Chart 4), while Alphabet gradually consolidated its dominant position to over 40% of market share in the global digital ad market (Chart 5). Collectively, the dominant duopoly control two-third of the entire digital advertising space, with many other competitors like Microsoft and Amazon fighting for the smaller slice of the pie.
The primary reason as to why Google and Facebook are so dominant in the digital ad space is pretty clear: they have cornered Search Ad and Social Media Ad segments respectively.
(a) Facebook Dominates Social Media Networks
Chart 6: No of Monthly Active Users of Top 10 Social Network Sites
Among the social media platforms, Facebook and YouTube (Alphabet’s Video-sharing website) stand as the top 2 most popular social media networks. Facebook currently has about 1.4 billion Daily Active Users (DAU) and 2.13 billion Monthly Active Users (MAU) as of Dec 2017 (Chart 6). It has been diligently monetising the user base, generating about USD39.9 billion in revenue in 2017 alone. The average revenue per user (ARPU) for Facebook is USD20.21 in 2017 and the figure has increased at an impressive 31.3% on a yearly basis across 2013 – 2017.
Over the years, Facebook has evolved into the ubiquitous one-stop shop for many users’ media needs, alongside its other popular services like WhatsApp (1.3 billion MAU) and Instagram (0.8 billion MAU). Being one of the first social media/networking platforms to come to market, its widespread appeal and user-friendly features led quickly to universal acceptance and a rapidly growing user base. This has meant that there are currently few alternatives that users can turn to, especially one that includes the extensive social network that one has built up on Facebook. Not to mention, the difficulty and inconvenience of switching to new apps.
(b) Alphabet Reigns Over The Internet Search Market
Chart 7: Global (ex-China) Search Engine Market Share 2012-2018
Similarly, Alphabet has become our one-stop shop for digital search functionality, be it services like Google Search or Google Maps – to the extent that Google has become synonymous with the Internet itself. Among the global (excluding China) leading search engines, Google has reigned over 90% of market share for the past 5 years and is likely to continue its dominance (Chart 7).
As mobile devices increasingly becoming the primary means of accessing the Internet, the number of paid search click through Google’s mobile search engine grew rapidly as well. Google was effective in capitalising its dominance in global search engine sector into digital advertising revenue for the company, raking in USD28.55 billion (77.8% of total US Search Ad revenue) in net US Search Ad revenue in 2017. We believe that top line growth for Google will be robust heading into 2018-2020, driven by the growth in mobile search queries and YouTube engagement ads.
Future Growth Drivers for the Duo
(a) Instagram and WhatsApp To Contribute More Towards Facebook's Top-line
While Facebook is the biggest social media platform by total user count, Facebook has two other wildly popular services – Instagram and WhatsApp – that are gradually contributing to its top-line growth. As a photo-sharing platform, Facebook’s Instagram is fast becoming the go-to social media application. It currently has 593.7 million MAUs worldwide and is set to reach 927.9 million users (30.5% of all social media users) by 2021 (Chart 8).
With the explosive growth of users, Instagram is expected to see its ad revenues balloon from USD4.10 billion in 2017 to USD10.87 billion by 2019. Instagram will also contribute 18% of its parent company’s overall revenue this year, and will likely be a significant contributor in the years ahead. Instagram users are on average younger (more than 50% below age of 30) than Facebook’s – likely to attract more advertising spending from businesses capturing that lucrative segment.
Chart 8: Instagram’s Projected Monthly Active Users (MAU) and Penetration Worldwide, 2016-21
Facebook’s popular messaging service, WhatsApp, has a total user count is at 1.3 billion (as of 2017) and is even bigger than Tencent’s (HKEX: 700) WeChat (890 million users). However, Facebook has yet to monetise WhatsApp seriously, which we believe has immense revenue-generating potential. For a start, it can replicate competing messaging apps like WeChat and Line, which have been monetising their user bases through various features such as advertisement, games, online payment functions and in-app purchase.
(b) Alphabet's Diversification Into New Projects
Alphabet has been gradually diversifying from its main source of revenue digital advertising, utilising the free cash flow generated to invest into a series of side projects such as Google Cloud, Google Home (smart home technology) and Waymo (driverless car division), as well as investing in advanced technologies like artificial intelligence and virtual reality. Alphabet’s Verily Life Science division is reported to be working on projects such as developing contact lens that continuously monitors glucose levels in diabetic patients.
Google Cloud (including GCP and G Suite) has reportedly been generating quarterly revenue USD1 billion. G Suite now has 4 million paying customers and a diverse base of clients from sectors such as retail, ad agencies and financial institutions. While the annual revenue of USD4 billion is considerably smaller than Amazon Inc (NASDAQ:AMZN) Web Services’ (AWS) revenue of USD20 billion+, Google Cloud looks set to be a strong contender in next few years.
Perhaps the most exciting segment, Waymo (the self-driving car division) is currently leading the development of autonomous vehicles. It has the potential to be a dominant player in the estimated USD7 trillion global Transportation as a Service (TAAS) industry over the next 20-30 years. As the global trend shift away from vehicle ownerships towards mobility services, we believe Waymo could potentially become bigger than Google’s Search Ad business – especially if Waymo extends further into ride-hailing, freight delivery and public transportation.
Investment Risks
Greater Government Oversights Due To Privacy Concerns
Exacerbated by recent Cambridge Analytica scandal, the duo’s practices of handling users’ data were brought to the close attention of governments worldwide. Additional regulations to safeguard users’ privacy might be imposed and there are concerns that the duo’s growth will be hindered by such regulations, given their heavy reliance on data to drive their core digital advertising activities.
While we think Alphabet and Facebook may incur greater expenses to ensure the safety of users’ data alongside other legal costs, they are in far better conditions to weather such costs than their smaller competitors. We believe that any margin compressions would likely be short-term, given the strong growth of the digital ad industry. The likelihood of increased regulatory measures to be imposed on the industry would also raise the barriers to entry for new competitors.
This saga will also provide the duo the freedom to clean up their databases and improve their policies surrounding users’ data privacy, which will help instil confidence among their users and advertisers in the longer term. As ironic as it may sound, we believe that this could be an invaluable opportunity for Alphabet and Facebook to fortify their dominant positions in the digital ad sector.
Tech Disruptions and Competitions
An inherent nature of the technology industry, just like their predecessors, Alphabet and Facebook are always at risk of being disrupted by competitors. The rising user adoption of virtual personal assistants (such as Amazon’s Alexa and Apple’s Siri) may pose a threat to Alphabet’s Ad Search segment. Such digital assistants have the potential to change the way users search for information on the Internet. Rather than using desktop or mobile search, users can utilise voice search from these digital assistants to search for information or purchase products on the go, bypassing Google in the process.
Fortunately, Alphabet has also been diligently developing their own virtual assistant, the Google Assistant, to compete with alternatives like Alexa and Siri. Installed by default on the newer Android-powered (Alphabet’s mobile operating system) devices, Google Assistant has one of the largest user base (46% of all smartphones globally) and is projected to expand its market share beyond 60% by 2022. This will give Alphabet an edge over its competitors in the years to come.
Fair Valuations
Alphabet
We believe that the intrinsic value of Alphabet is $1,302, based on a forward P/E ratio of 22 times our 2019E Alphabet EPS at $59.20 (Table 1). Our target PE is in line with the industry average forward PE ratio of 23.2 times. With the explosive growth in mobile ad revenue, we estimate the 3Y 2016-19E adjusted EPS CAGR at 18%. We feel that Alphabet is undervalued and is an attractive counter to accumulate in investors’ portfolios. Based on Alphabet’s closing price of $1,075.39 (as of writing), upside potential is 21.1%.
We believe that the intrinsic value of Facebook is $232.5, based on a forward P/E ratio of 22 times our 2019E Facebook EPS at $10.57 (Table 1). We estimate the 3Y 2016-19E adjusted EPS CAGR at 19.7%. Facebook has generated a free cash flow of USD17.5 billion for FY17 and has seen a consistent growth in its free cash flow for the last 5 years. This is important as it will allow Facebook to perform strategic acquisitions, ensuring their dominance in the social media industry. We feel that Facebook is undervalued and is an attractive counter to accumulate in investors’ portfolios. Based on Facebook’s closing price of $166.36 (as of writing), upside potential is 39.7%.
Table 1: Industry Peers Comparison
Industry Peer |
2019 F. P/E |
2019E EPS |
ROE (%) |
P/BV |
Gross Margin (%) |
Net Margin (%) |
Facebook Inc |
22.0 |
10.6 |
23.8 |
6.4 |
84.7 |
45.5 |
Alphabet Inc |
22.0 |
59.2 |
17.9 |
3.4 |
72.6 |
34.0 |
Baidu Inc (ADR) |
20.8 |
71.7 |
16.3 |
3.4 |
48.8 |
21.1 |
Tencent Holdings |
27.1 |
1.9 |
28.7 |
7.0 |
47.5 |
25.0 |
Twitter Inc |
41.4 |
0.8 |
12.7 |
3.7 |
69.0 |
18.9 |
Snap Inc |
- |
-0.3 |
-20.5 |
12.9 |
51.2 |
-23.2 |
Weibo Corp |
29.2 |
4.1 |
40.2 |
9.7 |
81.6 |
37.3 |
Peers Average |
27.1 |
21.1 |
17.0 |
6.6 |
65.0 |
22.7 |
Industry Average |
23.2 |
63.5 |
17.3 |
5.9 |
49.7 |
13.6 |
Source: : Company Earning Reports, Bloomberg, iFAST Compilations |
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