The coronavirus outbreak has been devastating in so many ways. Thankfully, it seems that the outbreak's exponential growth is under control due to stringent social distancing measures. Of course, successful social distancing means a dramatic slowdown in economic activity. It's already leading to dramatic job losses, bankruptcies, record-levels of monetary and fiscal stimulus, and a bevy of effects that depend on other unpredictable variables.

Slowing Ad Spending

Any recession tends to hurt companies and industries that are over-leveraged or amid a secular slowdown. It also leads to a decrease in consumer spending on discretionary items and forces businesses to retrench and cut expenses, as they focus on survival. This time, it's leading to a sharp drop in advertising spending which is negative for Facebook (FB  ) and Google (GOOG  ).

Ad rates for digital advertising are down between 30 to 50%. Some of this is being made up by higher impressions since people are spending more time online. In this bull market, one of the big drivers of online ad spending has been direct to consumer brand startups. These startups' growth strategy is to take venture capital spending and build businesses around selling products to consumers and use social media to raise awareness.

Google and Facebook Short-Term vs Long-Term

There's a lot of similarities to Yahoo during the dot.com bubble. Since Yahoo was the premier search engine at the time, there was a huge demand for ad spending on the site. However, when the dot.com bubble burst, Yahoo's revenues slowed down and ad rates dropped. This is likely to happen to Facebook and Google in the short-term.

Since the stock market bottom on March 23, it's interesting to note that of the 'FANG' stocks, Amazon (AMZN  ) and Netflix (NFLX  ) are close to exceeding their late-February highs. In contrast, the bounces for Facebook and Google have been much more tepid. Both are about 20% higher from their lows, while Netflix and Amazon are 34% higher. Additionally, they had more modest declines.

Of course, these divergent paths are not surprising as the conditions which are pressuring Facebook and Google's revenues are positive for Netflix and Amazon's revenues. However, in the long-term, the secular shift towards more advertising dollars spent digitally is only going to continue. At some point when economic activity returns to normal whether that is in months or years, ad spending will certainly rebound, and Facebook and Google will capture a bigger piece of the pie.