Twitter and Snap results send shivers down the digital advertising market

After the sharp selloff in tech stocks this year, Wall Street braced for signs that soaring inflation and rising interest rates are starting to eat away at 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 packed a punch that rippled through the digital advertising sector on Friday. With Facebook’s parent company Meta already facing what could be its first-ever revenue slump when it reports quarterly results on Wednesday, the news has fueled fears that a broader economic slowdown is starting to set in. to make felt.

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

Snap’s revenue disappointment, which came late Thursday, was the second time in two months that maker of dying messaging app Snapchat had sent the digital advertising industry into a tailspin. Its share price fell 43% in May when it first cut its guidance for the quarter. After recovering some of that lost ground, stocks slumped again on Friday, falling 39%.

The speed and extent of the deterioration in Snap’s business shocked analysts. Although the company is facing its own problems, its troubles show that economic weakness is beginning to eat away at the broader advertising industry.

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 worrying, according to several analysts, is the news that Snap has so far seen no growth in the current quarter. Wall Street had forecast an 18% expansion for the period.

Advertising on Twitter, meanwhile, contracted 1% from a year earlier, contrary to the 11% growth analysts expected.

Following the Snap shock a few hours prior, and in the face of the turmoil caused by Elon Musk’s aborted takeover bid, Twitter’s disappointment caused less of a surprise, though it did point to the broader downturn.

Shares of Meta fell nearly 8% in response, while Alphabet, Google’s parent company, fell 6%. Twitter’s share price, on the other hand, rose slightly, reflecting Wall Street’s continued belief that its merger agreement with the company will force Musk to complete the acquisition or pay a large settlement.

Along with the darkening economic outlook, a number of other factors have affected both individual businesses and the broader social media industry as a whole. For the social media industry as a whole, “a pretty unprecedented number of things” have combined to hold back growth, said Insider Intelligence analyst Jasmine Enberg.

They include privacy changes introduced by Apple last year, which limited the data apps running on its gadgets can collect to target their advertising.

Changes in consumer behavior have also added to business uncertainty, Enberg added, caused in particular by the rise of TikTok, which came out of nowhere to capture a large share of the social media audience. .

But it was mounting evidence of economic weakness that explains the cooling that spread across the digital advertising industry on Friday.

Snap in particular pointed to a combination of rising inflation and supply chain pressures – made worse by the war in Ukraine – which it said have significantly increased advertisers’ costs. This, in turn, had led them to cut back on advertising in the face of shrinking profit margins. He also blamed rising interest rates, which he said left some of his advertisers facing a higher cost of capital that also caused them to pull out.

Some analysts predicted that while those pressures were likely to be felt by other players in the online media industry, they would be more muted at big companies like Google’s parent company Meta and Alphabet.

Snap’s advertisers, for example, are said to include an unusually large number of start-ups in areas like cryptocurrencies and online brokerage, which depend on venture capital funding to keep them afloat. This throwback echoes the dotcom crash of two decades ago, when a VC squeeze hit start-up advertising.

Another difference, according to Thill, is that many of Snap’s advertisers are just starting to experiment with its advertising, making it an easy place to cut. Snap and Twitter each representing a small share of the online advertising market, they are also likely to suffer disproportionately as advertisers consolidate spending on fewer and larger platforms, Enberg added.

Google’s search advertising should be a relative bright spot, though the company still faces a tough comparison to a year ago, when revenue rebounded 62% after the pandemic slowed.

When Alphabet reports second-quarter results on Tuesday, Wall Street expects revenue growth to decelerate to 12%, down from 23% growth in the first quarter.

For Meta, meanwhile, a number of factors, including competition from TikTok and the lower level of advertising generated by its Reels feature, had already left many analysts predicting that last quarter’s revenue would match, at best, only to the previous year. With Facebook’s parent company heavily reliant on advertising from small and medium-sized businesses, it could face particular pressure in a downturn, Enberg said.

The evidence that digital advertising spend can swing so wildly has chilled the entire industry. The online auctions that companies like Snap use to sell advertising are designed to allow customers to quickly increase their spending when a particular campaign proves successful. But they also make removal easier.

“When it’s easier to turn on, it’s easier to turn off,” said Jeremi Gorman, Snap’s Chief Commercial Officer. As a result, digital advertising sees a shift in the economy faster than other forms of advertising, Snap executives said.

“There are no contracts, there are no big up-fronts,” Thill said. “It just shuts down,” Thill added.