Mark Zuckerberg, CEO of Meta Platforms, speaks at Georgetown University in Washington on October 17, 2019.
Andrew Caballero-Reynolds | AFP | Getty Images
Wall Street’s worst year since 2008 has devastated tech companies, especially those that rely on digital advertising.
facebook parents Meta lost nearly two-thirds of its value in 2022 as revenue fell for consecutive quarters year over year, causing the company to shed 13% of its workforce in November. snaps The stock plunged 81% as growth plummeted into single digits, and the company chose not to provide guidance for two straight periods. In August, Snap announced it was laying off 20% of its employees.
After a brutal 2022, investors are beginning to return to the online advertising sector ahead of an expected recovery in financial performance sometime in 2023. They’re hoping for some signs of recovery this week as space’s biggest companies report fourth-quarter results and provide an update on whether brands are starting to spend more on ads after pausing many of their campaigns.
Snap is scheduled to release results after Tuesday’s close. Meta reports on Wednesday followed by Google parents alphabet on Thursday. Investors will also be heard on Thursday Amazon and Appleboth of which have growing digital advertising businesses that have recently taken market share from Google and Facebook.
With worries about a possible recession still high, market analysts are expecting further turbulence for online advertising. A survey of 50 ad buyers released this month by Cowen found companies expect their spend to grow just 3.3% in 2023, which the investment bank says represents “the weakest outlook for ad growth in five years.” Over the past year, these companies increased their spending by 7.5%.
“Two-thirds of ad buyers factored in a recession as part of their budgeting process, citing inflation and a slowing consumer among other macro factors,” Cowen said.
In addition to the macro challenges, companies that rely on mobile data for ad targeting continue to expect disruption from Apple. In 2021, the iPhone maker introduced a new App Tracking Transparency (ATT) feature that reduced targeting opportunities by blocking advertisers from accessing a smartphone user ID. Meta said early last year that ATT would cut sales by $10 billion for all of 2022.
Zoom In IconArrows pointing outwards
Meta and Snap in the last 12 months
In his recent October conference call, as Meta stock slid in extended trading, CEO Mark Zuckerberg acknowledged a variety of headwinds the company is facing, including the economy, ATT, and competition — and thanked remaining investors for their patience.
“I think those who are patient and invest in 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 winds down. However, sales growth is not expected to pick up again until the second half of the year.
Analysts expect Snap to report less than 1% growth in the fourth quarter, followed by 1.6% growth in the current period, according to Refinitv.
Meta, whose ad business is more than 20 times the size of Snap’s, is expected to report a third straight quarter of declines — and its biggest decline yet — of more than 6%, according to Refinitiv. Revenue is expected to fall another 2.8% in the first quarter before returning to sub-1% growth in the second period.
Since April 2021, when Apple’s ATT update went into effect, Meta has been working to improve its advertising technology and leverage data from other sources. For example, some retailers told CNBC that they ported their customer data from theirs Shopify websites into Meta’s platforms, which has helped improve Meta’s ability to target personalized ads to users.
“There are some signs that Facebook may be seeing a small reversal in ad spending,” said Debra Williamson, an analyst at research firm Insider Intelligence.
However, TikTok has pushed consumers from stagnant updates to short videos, and Facebook has been slow to catch up. Meanwhile, despite Meta’s incremental improvements to its ad system, the impact of Apple’s privacy change has been so severe that Facebook and Instagram are nowhere near able to offset it.
“Facebook had many challenges building their own tools and metrics to demonstrate the effectiveness of these ads,” Williamson said. “I think this is getting better, so I’m hoping that maybe we’ll see a little rebound for Facebook compared to the past few quarters.”
Google’s business has been less hurt by Apple’s moves, but it’s still being hit hard by the economic slowdown and TikTok. Growth at Alphabet is expected to be below 1% in the fourth quarter of 2022 and slowly build up in 2023, only turning into double digits in the last period of the year.
“Among existing players, TikTok is expected to be the largest market share gainer in digital video advertising over the next two years,” Cowen analysts wrote. They estimate that TikTok will take 8% of budgets in 2024, up from 6% last year.
Amazon’s advertising business has also made great strides as e-retailers show their willingness to pay big bucks to promote their brands on the company’s website and across its various services. According to Insider Intelligence, Amazon captured 13% of the digital ad market last year and in the third quarter, its ad business grew 25%, though total revenue missed estimates.
Analysts expect Amazon’s ad unit to post 17% growth in the fourth quarter, well above its peers, and to remain in the mid-teens through 2023, according to FactSet.
And then there is Netflix, which added advertising as a revenue stream. The company introduced a new ad-supported streaming tier in November that costs $6.99 per month.
“Netflix is expected to grow from 0% of budgets in 2022 to almost 4% of digital video ad spend by 2024,” Cowen analysts said.
But the biggest uncertainty threatening this year’s online advertising market is the shaky economy, said Barton Crockett, an analyst at Rosenblatt Securities. He has hold ratings on Meta, Snap, Amazon, and Netflix, but recommends buying Alphabet and Apple, according to FactSet.
As the economy improves, “things that are very economical, like advertising, are going to be an attraction for investors across the spectrum,” Crockett said. “That could be great for everyone in this group.”
It’s a huge and risky bet. The US Department of Commerce said last week that consumer spending fell 0.2% in December, suggesting people are still holding on to their money.
“In these circumstances, it’s going to be difficult to meaningfully increase ad spend,” Crockett said.
LOOK AT: Meta will bounce back “extremely strong”.