Facebook’s struggling ad business at the center of Big Tech’s earnings

The Meta Platforms logo appears in Davos, Switzerland, May 22, 2022.

Arend Wegmann | Reuters

It’s a profit-packed week for Big Tech, with the four most valuable US companies plus Meta reporting quarterly results.

Alphabet and Microsoft kicked off the event on Tuesday, with Apple and Amazon wrapping things up on Thursday. Trapped between them dead on Wednesday.

Investors of all five names are hurting this year as rising inflation, rising interest rates and fears of a recession hit the tech sector. Within the group of big companies, Meta has suffered the most, losing half its value as the faltering advertising business on Facebook is yet to show signs of recovery.

When Meta releases second-quarter numbers, Wall Street will be looking closely for indications that growth is about to return. It also needs to see improved trends when it comes to users, who have fled the company’s apps in recent quarters in favor of competitors like TikTok.

“They’re starting to get tired of it,” said Debra Aho Williamson, an analyst with research firm Insider Intelligence. “Users definitely gravitate towards other platforms or engage with Facebook less, and when you start seeing that happen in larger and larger amounts, then advertisers really start to take notice.”

Facebook is expected to show its first year-over-year revenue decline in the second quarter, and analysts expect a moderate acceleration in the third quarter with mid-single-digit growth. The report turns to the mood in the mobile advertising industry.

Last week, Snap reported disappointing second-quarter results, missed revenue and earnings, and announced plans to slow hiring. Snap blamed the tough economy and Apple’s privacy change on iOS as major hurdles, along with competition from TikTok and others.

In terms of revenue, Snap and Meta are “both in the same place,” Barton Crockett, an analyst at Rosenblatt Securities, told CNBC.

“They’re not growing, but they’re not falling off a cliff right now,” said Crockett, who has a suspended rating on both stocks.

From a user’s point of view, Snap holds up better. The company said last week that its daily active users grew 18% year-over-year to 347 million. The number of DAUs on Facebook rose 4% in the first quarter to 1.96 billion, and analysts expect that number to remain flat, according to FactSet, which would represent roughly 3% growth from a year earlier.

“Snap is in a stronger position in terms of user growth,” Crockett said.

Like Snap, Facebook has been hit hard by Apple’s iOS update, which makes it difficult for advertisers to target users. A large part of Facebook’s value to marketers is its targeting capabilities and the ability to track users across multiple third-party sites.

With shares down 50% this year, Meta’s market capitalization has fallen to less than $500 billion, putting the company’s value below Tesla, Berkshire Hathaway and UnitedHealth, as well as its Big Tech peers.

Amazon is down 27% in 2022, Alphabet is down 25%, Microsoft is down 23%, and Apple is down 13%.

The last time Meta reported results, revenue fell just shy of estimates. CEO Mark Zuckerberg said some of the challenges are due to iOS change as well as “broader macro trends, such as the resiliency in e-commerce following the acceleration we’ve seen during the pandemic.”

The rise of TikTok poses a growing threat to Facebook and Snap, as the popular short video app is reeling in the lucrative market for teens and young adults.

Meanwhile, Meta continues to spend billions of dollars creating the metaverse, a digital world that people can access with virtual reality and augmented reality goggles.

Meta is currently a leader in the nascent metaverse space, according to CCS Insight analyst Leo Gebbie. Based on a recent VR and AR survey by Gebbie, Meta is the company most people associate with the idea of ​​the metaverse, underscoring the importance of its investment and marketing efforts.

But it is still years away from turning into the mainstream and making potential profits. Gebbie said he’ll be looking to see if Zuckerberg is spending a lot of time on the earnings call discussing the future metaverse or if he’s focused on tackling Meta challenges in the real world.

“I think we will definitely see more focus on telling the story that Meta is a reasonable company,” Gibby said.

Watch: Meta will be the #1 player on social media by 2023

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