The growth of Facebook Inc.’s (FB, Financial) digital advertising revenues was so fast and so furious they were emerging as a credible threat to Google’s dominance in the digital advertising world. In a short span of five years, Facebook’s annual revenues grew more than fivefold, from $5.089 billion in 2012 to $27.638 billion in 2016. Before Facebook came into the picture, Alphabet Inc.'s (GOOG, Financial)(GOOGL) Google was the only player in the digital advertising world with tens of billions of dollars in revenues. Facebook was clearly taking market share away.
But a closer look at the growth rate of Google’s annual revenues will reveal there was no visible slowdown due to Facebook’s growth. Alphabet kept its revenues growing at double-digit rates for the past five years. In 2016, Alphabet reported $86.237 billion in annual revenues, growth of 15% compared to the prior period. Achieving double-digit growth when your annual revenues are getting close to $100 billion is no mean feat, and it clearly shows, despite the competition, Google has kept its advertising dollars growing in an uninterrupted manner.
One of the main reasons for the strong growth at both companies is the digital advertising market has been experiencing phenomenal growth in the last decade, and the trend should continue in the short to medium term. The amount of time people spend on traditional broadcasting mediums has declined due to the increasing amount of time spent online. Naturally, advertisers will go where the consumers are. So if time spent on TV starts to drop, that means fewer ad dollars will go toward TV and more where the people are - in this case, online.
According to recent report by emarketer, Facebook and Google will continue their domination in digital advertising in the U.S. Facebook’s display ad revenue will grow 32.1% while Google is expected to grow its search ad revenues by 16.1%. U.S. digital ad spending is forecasted to hit $83 billion in 2017, representing growth of 15.9%.
In addition, Google is expected to maintain its dominance and account for 40.7% of 2017 digital ad revenues in the U.S.— more than double Facebook's share.
There is enough space in the digital advertising market for both these companies to coexist - a trend we have seen play out over the past five years. Facebook‘s net revenues are much smaller compared to those of Alphabet - and the growth rate is much higher as well. But as the company gets bigger and bigger, its growth rate will come down closer to the industry average, which is the level at which Alphabet is growing right now.
Disclosure: I have no positions in the stocks mentioned and no intention of initiating a position in the next 72 hours.
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