Meta earnings report will provide hint at how online ads are doing

Wall Street’s worst year since 2008 has wreaked havoc on tech companies, especially those that rely on digital advertising.

Parents Facebook Meta lost nearly two-thirds of its value in 2022 as year-over-year results fell in consecutive quarters, prompting the company in November to cut 13% of its workforce. Snap it shares plummeted 81% as growth dipped into single digits, and the company chose not to provide forecasts for two straight periods. In August, Snap said it had laid off 20% of its employees.

After a brutal 2022, investors are beginning to return to the online advertising sector before recovering financial performance at some point in 2023. They are hoping for some signs of recovery this week as the largest company in the space reports. fourth quarter results and gave an update on whether brands are starting to spend more on advertising this year after pausing many campaigns.

Snap is scheduled to release results after the close of trading on Tuesday. Meta reports on Wednesday, followed by parent Google Alphabet on Thursday. Also on Thursday, investors will hear from Amazon and Appleboth of which are developing digital advertising businesses that have been taking market share of late from Google and Facebook.

With concerns about a potential recession still lingering, market analysts expect more turmoil for online advertising. A survey of 50 ad buyers published this month by Cowen showed that companies expect ad spending in 2023 to grow just 3.3%, which the investment bank said is “the softest advertising growth outlook we’ve seen in five years.” Last year, the company increased spending by 7.5%.

“Two-thirds of ad buyers factor the recession as part of the budgeting process, citing inflation and soft consumers, among other macro factors,” Cowen said.

In addition to macro challenges, companies that rely on mobile data for ad targeting are still weighing up the upheaval caused by Apple. In 2021, the iPhone maker introduced a new App Tracking Transparency (ATT) feature, which reduces targeting capabilities by restricting advertisers from accessing smartphone user identifiers. Meta said early last year that ATT will reduce revenue by $10 billion for all of 2022.

In the latest earnings call in October, as the stock of Meta collapsed in after-hours trading, CEO Mark Zuckerberg acknowledged many of the headwinds facing the company, including the economy, ATT and competition, and left to thank investors for their patience.

“I think that those who are patient and invest with us will be rewarded,” Zuckerberg said.

So far in 2023, there have been some rewards. Meta and Snap are both up more than 22% as January draws to a close. But revenue growth is not expected to pick up again for half a year.

Analysts expect Snap to show fourth-quarter growth of less than 1%, followed by 1.6% expansion in the current period, according to Refinitv.

Meta, whose ad business is more than 20 times Snap’s size, is expected to report a third-quarter decline — and the steepest decline — of more than 6%, according to Refinitiv. Revenue is expected to fall another 2.8% in the first quarter, before sub-1% growth returns in the second period.

Since April 2021, when Apple’s ATT update takes effect, Meta has been working to improve its advertising technology and use data from other sources. Some retailers, for example, told CNBC that they had sent customer data from the company Shopify website to the Meta platform, which helps improve Meta’s ability to target personalized ads to users.

“There are some signals that maybe Facebook is seeing some changes in ad spending,” said Debra Williamson, an analyst at research firm Insider Intelligence.

However, TikTok has pushed consumers away from stagnant updates to short videos, and Facebook is slowly following the trend. Meanwhile, despite the meta improvements to the ad system, the impact of Apple’s privacy changes has been so severe that Facebook and Instagram have not been able to cope.

“Facebook has had many challenges in creating its own tools and metrics to prove the effectiveness of these ads,” Williamson said. “I think it’s better, so I’m hoping that there might be a rebound for Facebook, compared to the last few quarters.”

Google’s business was less damaged by Apple’s move, but it was still affected by the economy and TikTok. Growth at Alphabet is expected to fall below 1% in the fourth quarter of 2022 and slowly build in 2023, not reaching double digits until the last quarter of the year.

“Among existing players, TikTok is expected to be the biggest share gainer in Digital Video advertising over the next two years,” Cowen analysts wrote. They estimate that TikTok will get 8% of the budget in 2024, up from 6% in 2022.

Amazon’s advertising business has also made big inroads, as the e-retailer has shown a willingness to pay big bucks to promote its brand on the company’s site and in its various services. According to Insider Intelligence, Amazon accounted for 13% of the digital advertising market last year, and in the third quarter Amazon’s advertising business grew by 25% although overall revenue missed estimates.

Analysts expect Amazon’s ad unit to show 17% growth in the fourth quarter, ahead of its peers, and remain in the mid-teens in 2023, according to FactSet.

Then there is Netflix, which has added advertising as a revenue stream. The company launched a new ad-supported streaming tier in November that costs $6.99 a month.

“Netflix is ​​expected to grow from 0% of its budget in 2022 to nearly 4% of its Digital Video advertising by 2024,” Cowen analysts said.

However, the biggest uncertainty in the online advertising market this year is the faltering economy, said Barton Crockett, an analyst at Rosenblatt Securities. He has hold ratings on Meta, Snap, Amazon and Netflix, and recommends buying Alphabet and Apple, according to FactSet.

If the economy improves, “things that are very sensitive about the economy, like advertising, will be attractive to investors across the spectrum,” Crockett said. “This could be good for everyone in this group.”

It’s a giant and risky bet. The US Commerce Department said last week that consumer spending fell 0.2% in December, indicating that people are still holding on to cash.

“Under these conditions, it will be difficult to have any meaningful expansion of advertising,” Barton Crockett said.

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