Tech companies were severely harmed by Wall Street’s worst year since 2008, especially those dependent on digital advertising.
As year-over-year revenue decreased in consecutive quarters, the parent company of Facebook, Meta, lost about two-thirds of its value in 2022, prompting the firm to lay off 13% of its workers in November. As growth fell into the single digits, Snap’s stock fell 81%, and the firm decided not to release a projection for the second time in a row. In August, Snap said it was laying off 20% of its employees.
Investors are starting to return to the online advertising market after a tough 2022 before a financial performance bounce that’s anticipated at some point in 2023. As the largest players in the industry release their fourth-quarter results and give an update on whether businesses are starting to spend more on advertising after stopping many of their campaigns, they are hoping to see some signs of a rebound this week.
Snap is scheduled to issue results after the close of trading on Tuesday. Meta reports on Wednesday, followed by Google parent Alphabet on Thursday. Also on Thursday, investors will hear from Apple and Amazon, both of which have expanding digital ad companies that recently have been displacing Google and Facebook in terms of market share.
Market analysts predict more turbulence for internet advertising in the future as worries about a potential recession continue to be quite present. A survey of 50 ad buyers published this month by Cowen showed that companies expect their spending in 2023 to rise just 3.3%, which the investment bank said represents “the softest ad growth outlook we’ve seen in five years.” Last year, those companies increased spending by 7.5%.
“Two-thirds of ad buyers factored in a recession as part of their budgeting process, citing inflation and a softening consumer, among other macro factors,” Cowen said.
Companies that rely on mobile data for ad targeting must still deal with disruption brought on by Apple in addition to the macro problems. In 2021, the iPhone maker instituted a new App Tracking Transparency (ATT) feature, which reduced targeting capabilities by limiting advertisers from accessing a smartphone user identifier. Meta said early last year that ATT would reduce revenue by $10 billion for all of 2022.
Facebook has had a lot of challenges with coming up with its own tools and metrics to be able to prove the effectiveness of those ads. I think it’s getting better at that, so I’m hopeful that we will see maybe a bit of a rebound for Facebook compared to the past couple of quarters.
Debra Williamson
In its most recent earnings call in October, as Meta’s stock sank in extended trading, CEO Mark Zuckerberg acknowledged a multitude of headwinds facing the company, including the economy, ATT and competition and he was left thanking the remaining 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. As January draws to a conclusion, Meta and Snap are both up by more than 22%. However, it won’t be until the second half of the year that revenue growth is anticipated to resume.
Refinitv reports that analysts anticipate Snap to expand by less than 1% in the fourth quarter and 1.6% in the current quarter.
‘Little bit of a rebound’
According to Refinitiv, Meta, whose ad business is more than 20 times larger than Snap’s, is anticipated to announce a third consecutive quarter of decreases, including its largest decline yet at more than 6%. 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 went into effect, Meta has been working on improving its advertising technology and has been utilizing data from other sources. Some retailers, for instance, told CNBC that they’ve been porting their customer data from their Shopify websites into Meta’s platforms, which has helped improve the ability for Meta to target personalized ads to users.
“There’s some signals that maybe Facebook is seeing a little bit of a turnaround in ad spending,” said Debra Williamson, an analyst at research firm Insider Intelligence.
However, TikTok has driven consumers from stagnant updates to short videos, and Facebook has been slow to catch up. Facebook and Instagram are a long way from making up for the impact of Apple’s privacy shift, even with minor changes made to its ad system by Meta.
“Facebook has had a lot of challenges with coming up with its own tools and metrics to be able to prove the effectiveness of those ads,” Williamson said. “I think it’s getting better at that, so I’m hopeful that we will see maybe a bit of a rebound for Facebook compared to the past couple of quarters.”
Google’s business has been less harmed by Apple’s moves, but it’s still being hit hard by the economic slowdown and by TikTok. Alphabet’s growth is anticipated to be less than 1% in the fourth quarter of 2022 and to increase gradually in 2023, hitting double digits only in the year’s final quarter.
“Among the existing players, TikTok is expected to be the largest share gainer within Digital Video advertising over the next two years,” Cowen analysts wrote. They estimate TikTok will capture 8% of budgets in 2024, up from 6% last year.
As e-retailers demonstrate their readiness to spend large sums of money to promote their brands on the company’s website and throughout its different services, Amazon’s ad division has also made significant strides. According to Insider Intelligence, Amazon captured 13% of the digital ad market last year, and in the third quarter its ad business grew by 25% even as overall revenue missed estimates.
Analysts expect Amazon’s ad unit to show growth of 17% in the fourth quarter, well ahead of its peers, and to stick in the mid-teens throughout 2023, according to FactSet.
And then there’s Netflix, which has added advertising as a revenue stream. The company debuted a new ad-supported streaming tier in November that costs $6.99 a month.
“Netflix is expected to climb from 0% of budgets in 2022 to nearly ~4% of Digital Video ad spend by 2024,” the Cowen analysts said.
Still, the biggest uncertainty looming over this year’s online ad market is the shaky economy, said Barton Crockett, an analyst at Rosenblatt Securities. He has a hold rating on Meta, Snap, Amazon and Netflix, but recommends buying Alphabet and Apple, according to FactSet.
If the economy improves, “things that are very economically sensitive, like advertising, will be an attraction for investors across the spectrum,” Crockett said. “That could be great for everyone in this group.”
It’s a giant and risky bet. The U.S. Department of Commerce said last week that consumer spending dropped 0.2% in December, indicating that people are still holding on to their cash.
“In that circumstance, it will be hard for there to be any kind of meaningful expansion of ad spend,” Crockett said.
