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Despite headwinds, analysts expect Q2 ad recovery for Twitter, Facebook

As Facebook Inc. and Twitter Inc. prepare to report quarterly earnings, analysts largely expect the companies to post solid advertising results despite lingering impacts from COVID-19 and a global ad boycott.

While Facebook and Twitter declined to provide guidance for the second quarter, each highlighted advertising declines in the previous period that they warned could continue as businesses of all sizes cut costs amid the coronavirus pandemic. Facebook also faces an ad boycott from a growing list of major brands that appears far from over. Despite these challenges, analysts still expect advertising revenue to stabilize in the quarter and to gain momentum toward the end of the year as headwinds subside.

Growth projections

A June survey conducted by the Interactive Advertising Bureau calls for U.S. digital ad spend to jump 13% year over year in the second half of 2020. That compares to previous surveys calling for U.S. digital ad spend to decline roughly 33% year over year between March and June. The June IAB survey interviewed 148 media planners, media buyers and brand executives about their U.S. ad spending plans for the remainder of the year.

RBC Capital Markets analyst Mark Mahaney expects Facebook's advertising revenue growth rate to be 5% year over year for the June quarter. Though the analyst said the second quarter should be the company's worst period in the advertising category this year, he anticipates the segment will make a near-complete recovery by the end of the fourth quarter.

Facebook reported advertising revenue of $17.44 billion for the first quarter, up 17% year over year from $14.91 billion in the same period a year ago.

Facebook executives on an April earnings call highlighted a pullback in ad demand and a related decline in the pricing of its ads during the last three weeks of the first quarter. But they also noted signs of ad stability in the first three weeks of April, with advertising revenue approximately flat year over year at the start of the second quarter.

For Twitter, Mahaney forecasts the company's ad revenue to decline 20% year over year in the second quarter before gradually recovering during the second half of the year.

Twitter's ad revenue totaled $682.2 million in the first quarter, up from $679.5 million in the same period a year ago. Twitter noted in its first-quarter results that ad revenue declined roughly 27% year over year between March 11 and March 31 as a result of widespread economic impacts related to the coronavirus.

Boycott impact

Analysts are also monitoring any potential hit to Facebook's business as a result of an ad boycott looming over the company.

Large advertisers like Verizon Communications Inc. and Coca-Cola Consolidated Inc. have temporarily halted ad spend on Facebook and other social media platforms as part of a broader campaign urging these companies to do more to reduce the spread of harmful content.

Brian White, an analyst at boutique equity research and trading company Monness Crespi Hardt & Co., lowered his estimates on Facebook stock, citing the ad boycott and near-term uncertainty regarding the resurgence in COVID-19 cases across the country. But overall, White remains bullish on Facebook's long-term potential, noting the company has faced similar hurdles in the past only to emerge stronger on the other side.

"For the foreseeable future, we anticipate Facebook will struggle with weak digital ad spending trends and remain vulnerable to a deluge of negative media headlines," he wrote. "However, we believe the stock remains inexpensive and Facebook has an opportunity to emerge from this crisis a stronger company."

White now expects Facebook to post full-year 2020 revenue of $72.43 billion, compared to previous estimates of $75.13 billion.

Similarly, Joe Wittine, a senior research analyst at independent equity research provider Edgewater Research, said the ad boycott should have a "limited impact" on Facebook, with a "sharper" ad acceleration expected in the third quarter.

"We have a generally positive view of the macro environment through Facebook's lens given that the recovery in advertising spend we have seen in recent months seems to be approaching pre-COVID type levels," he wrote in a report.

Twitter reports earnings before-market July 23 and Facebook posts results after the market closes July 29.

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