Twitter and Snap results shake digital ad market


Written by admin



After a sharp sell-off in tech stocks this year, Wall Street has braced for signs that rising inflation and higher interest rates are starting to dampen demand for the sector’s products and services. Twitter and Snap may have just provided some of the first evidence that this moment has arrived.

Weak earnings reports from social media companies dealt a double whammy that hit the digital advertising sector on Friday. With Facebook’s parent company Meta already facing what could be its first-ever revenue decline when it reports quarterly earnings on Wednesday, news fears a broader economic slowdown is starting to bite.

Digital advertising often acts as a leading indicator of the online economy, making it the “canary in the coal mine” for the entire online consumer sector, said Jefferies analyst Brent Till.

Snap’s earnings disappointment, which came late Thursday night, was the second time in two months that maker of disappearing messaging app Snapchat sent the digital advertising sector into a tailspin. Its share price fell 43% in May when it cut its quarterly guidance for the first time. Having regained some of the lost positions, on Friday, the shares collapsed again, falling by 39%.

The speed and extent of Snap’s business deterioration shocked analysts. Although the company faces its own challenges, its problems show that economic weakness is starting to gnaw at the advertising sector as a whole.

From 38% in the first quarter – already a marked slowdown since the middle of last year – Snap’s revenue growth fell to 13% in the second.

Even more troubling, according to some analysts, was the news that Snap has so far shown no growth in the current quarter. Wall Street is targeting an 18 percent gain over this period.

Meanwhile, Twitter ads fell 1% year-over-year, in contrast to the 11% growth expected by analysts.

After the Snap shock of hours earlier, and in the face of the turmoil caused by Elon Musk’s failed takeover bid, the Twitter disappointment came as less of a surprise, though it underlined a broader slowdown.

In response, Meta’s shares fell nearly 8%, while Google’s parent company Alphabet shares fell 6%. By contrast, Twitter’s share price rose slightly, reflecting Wall Street’s persistent belief that its merger deal with the company will either force Musk to go through with the deal or pay a hefty compensation.

In addition to the deteriorating economic outlook, a number of other factors have impacted both individual companies and the broader social media sector as a whole. For the social media sector as a whole, “a fairly unprecedented number of things” combined to drive growth, according to Jasmine Enberg, an analyst at Insider Intelligence.

These include privacy changes Apple made last year that limited the data that apps running on its gadgets can collect to target their ads.

Enberg added that changes in consumer behavior have also exacerbated business uncertainty, fueled in part by the rise of TikTok, which has come out of nowhere to take over the majority of the social media audience.

But it was the gathering of evidence of economic weakness that caused the cold that gripped the entire digital advertising sector on Friday.

Snap pointed in particular to a combination of rising inflation and supply chain pressure exacerbated by the war in Ukraine, which it said has significantly increased advertiser spending. This, in turn, forced them to cut advertising in the face of declining profits. He also blamed rising interest rates, which he said caused some of his advertisers to face a higher cost of capital, which also caused them to back out.

Some analysts have predicted that while the pressure is likely to be felt elsewhere in the online media industry, it will be more muted at larger companies such as Google’s parent company Meta and Alphabet.

For example, Snap advertisers are believed to include an unusually large number of startups in fields such as cryptocurrencies and online brokerage that rely on venture capital funding to stay afloat. This makes the setback echo the dot-com crash two decades ago, when venture capital cuts hit startup advertising.

Another difference, according to Till, is that many of Snap’s advertisers are just starting to experiment with ads, making it easy to opt-out. Enberg added that because Snap and Twitter account for a small share of the online advertising market, they are also likely to be hit disproportionately as advertisers consolidate their spending on fewer larger platforms.

Google’s search ads are expected to be a relatively bright spot, although the company still faces a tough comparison from a year earlier, when revenue rebounded 62% due to the slowdown in the pandemic.

When Alphabet reports its second-quarter earnings on Tuesday, Wall Street expects revenue growth to slow to 12% from 23% growth in the first quarter.

For Meta, meanwhile, a number of factors, including competition from TikTok and lower levels of ads generated by its Reels feature, have already led many analysts to predict that latest quarter revenue will only match the previous year at best. Because Facebook’s parent company is heavily dependent on SMB ads, Enberg said it could face particular pressure during an economic downturn.

Evidence that digital advertising spending can fluctuate wildly has sent chills across the sector. The online auctions that companies like Snap use to sell ads are designed to allow customers to quickly increase spending when a particular campaign proves effective. But they also make it easier to roll back.

“When it’s easier to turn it on, it’s easier to turn it off,” said Jeremy Gorman, Snap’s chief commercial officer. As a result, Snap executives say digital advertising registers changes in the economy faster than other forms of advertising.

“No contracts, no big advances,” Till said. “It just turns off,” Till added.

#Twitter #Snap #results #shake #digital #market



About the author


Leave a Comment