After a big selloff in tech stocks this year, Wall Street is bracing for signs that rising inflation and higher interest rates are starting to affect demand for the sector’s products and services. Twitter and Snap may have provided just some of the first evidence that that moment has arrived.
Weak earnings reports from social media companies delivered a one-two punch that reverberated through the digital advertising sector on Friday. With Facebook parent Meta already facing what could be its first revenue decline when it reports quarterly earnings on Wednesday, the news fears a broader economic slowdown is starting to hit.
Digital advertising often acts as a leading indicator of the Internet economy, making it the “canary in the coal mine” for the entire consumer Internet sector, said Brent Thill, an analyst at Jefferies.
Snap’s earnings disappointment, which came late on Thursday, was the second time in two months that the maker of moribund messaging app Snapchat has put the digital advertising sector in a bind. Its share price fell 43 percent in May, when it first cut guidance for the quarter. After regaining some of the lost ground, the stock tumbled again on Friday, falling 39 percent.
The speed and sheer scale of the deterioration in Snap’s business shocked analysts. Although the company is facing problems of its own, its troubles show that the economic weakness is beginning to affect the wider advertising sector.
From 38 percent in the first quarter — already a marked slowdown since the middle of last year — Snap’s revenue growth fell to 13 percent in the second.
Even more troubling, according to some analysts, was the news that Snap has so far not posted growth in the current quarter. Wall Street had posted an 18 percent expansion for the period.
Meanwhile, advertising on Twitter shrank 1 percent from a year ago, in contrast to the 11 percent growth analysts expected.
After the Snap shock that came hours earlier, and in the face of the turmoil caused by Elon Musk’s aborted takeover bid, the frustration on Twitter caused less surprise, though it underscored the broader slowdown.
Shares in Meta fell nearly 8 percent in response, while Alphabet, the parent of Google, fell 6 percent. In contrast, Twitter’s share price rose slightly, reflecting continued confidence on Wall Street that its merger agreement with the company will either force Musk to go ahead with the acquisition or pay a sizable settlement.
As well as the bleak economic outlook, a number of other factors have hit both individual companies and the wider social media sector as a whole. For the social media sector overall, “a fairly unprecedented number of things” have combined to hurt growth, said Jasmine Enberg, an analyst at Insider Intelligence.
They include privacy changes introduced by Apple last year, which have limited the data that apps running on its devices can collect to target their ads.
Changes in consumer behavior have also added to business uncertainty, Enberg added, caused in particular by the rise of TikTok, which has come out of nowhere to command a large portion of the social media audience.
But it was gathering evidence of economic weakness that caused a chill to spread throughout the digital advertising sector on Friday.
Snap pointed in particular to a combination of rising inflation and supply chain pressures — exacerbated by the war in Ukraine — that it said had greatly increased costs for advertisers. This, in turn, had prompted them to cut advertising in the face of shrinking profit margins. It also blamed rising interest rates, which it said had left some of its advertisers facing a higher cost of capital that had prompted them to pull out.
Some analysts predicted that while these pressures were likely to be felt by others in the online media industry, they would be more muted at larger companies such as Meta and Google’s parent Alphabet.
Snap’s advertisers, for example, are thought to include an unusually large number of start-ups in fields like cryptocurrencies and online brokerage, which rely on venture capital funding to keep them afloat. That makes the retreat an echo of the dotcom crash of two decades ago, when a shrinking of venture capital hit advertising from start-ups.
Another difference, according to Thill, is that many of Snap’s advertisers are just starting to experiment with its ads, making this an easy place to cut. With Snap and Twitter each accounting for a small share of the online advertising market, they are also likely to suffer disproportionately as advertisers consolidate their spending on fewer, larger platforms, Enberg added.
Google’s search advertising is expected to be a relatively bright spot, although the company still faces a tough comparison to a year ago, when revenue bounced back 62 percent as the pandemic slowed.
When Alphabet reports second-quarter earnings on Tuesday, Wall Street expects revenue growth to slow to 12 percent, from the first quarter’s 23 percent rise.
Meanwhile, for Meta, a number of factors, including competition from TikTok and the lower level of advertising generated by the Reels feature, had already left many analysts predicting that revenue in the latest quarter would, at best, to match only last year. With parent Facebook heavily dependent on advertising from small and medium-sized businesses, it could face particular pressure in a downturn, Enberg said.
Evidence that spending on digital advertising can fluctuate so wildly has sent a chill across the sector. The online auctions that companies like Snap use to sell ads are designed to make it easy for customers to quickly ramp up spending when a particular campaign proves effective. But they also make it easy to withdraw.
“When it’s easier to turn on, it’s easier to turn off,” said Jeremi Gorman, Snap’s chief business officer. As a result, digital advertising is faster to register a change in the economy than other forms of advertising, according to Snap executives.
“No contracts, no big money,” Thill said. “It just goes off,” Thill added.
