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Wall Street’s worst year since 2008 wreaked havoc on tech companies, particularly those reliant on digital advertising.
Facebook parent Meta lost almost two-thirds of its value in 2022 as year-over-year revenue fell in consecutive quarters, leading the company in November to cut 13% of its workforce. Snap’s stock plummeted 81% as growth dipped into the single digits, and the company opted not to provide a forecast for two straight periods. In August, Snap said it was laying off 20% of its employees.
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Following a brutal 2022, investors are starting to return to the online ad sector before a rebound in financial performance that’s expected at some point in 2023. They’re hoping for some signs of a recovery this week as the biggest companies in the space 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 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 Amazon and Apple, which both have growing digital ad businesses that have been taking market share of late from Google and Facebook.
With concerns of a potential recession still looming large, market analysts anticipate more turmoil ahead for online advertising. 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.
In addition to the macro challenges, companies that rely on mobile data for ad targeting are still reckoning with upheaval caused by Apple. 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.
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. Meta and Snap are both up more than 22% as January comes to a close. But revenue growth isn’t expected to pick back up until the second half of the year.
Analysts expect Snap to show fourth-quarter growth of less than 1%, followed by expansion of 1.6% in the current period, according to Refinitv.
‘Little bit of a rebound’
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 steepest drop yet — at 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 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. Meanwhile, even with Meta’s incremental improvements to its ad system, the impact of Apple’s privacy change was so severe that Facebook and Instagram are nowhere close to making up for it.
“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. Growth at Alphabet is expected to come in below 1% in the fourth quarter of 2022 and slowly build in 2023, not reaching double digits until the last period of the year.
“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.
Amazon’s ad business has also made major inroads, as e-retailers show their willingness to pay big bucks to promote their brands on the company’s site 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 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.