Twitter and Snap Results Make the Digital Ad Market Cringe – Financial Times | Region & Cash

After this year’s sharp sell-off in technology stocks, Wall Street braced itself for signs that rising inflation and higher interest rates are beginning to hurt 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 delivered a double whammy on Friday that echoed through the digital advertising sector. With Facebook’s parent company Meta already facing what may be its first revenue slump when it reports quarterly results on Wednesday, the news outlet is concerned a broader economic slowdown is beginning to take hold.

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 sector, said Brent Thill, an analyst at Jefferies.

Snap’s earnings disappointment, which came late Thursday, was the second time in two months that the maker of disappearing news app Snapchat has sent the digital ads sector into a tailspin. Its share price plummeted 43 percent in May when it lowered guidance for the quarter for the first time. After recouping some of that lost ground, the stock plunged again on Friday, losing 39 percent.

The sheer speed and scale of the deterioration in Snap’s business shocked analysts. While the company faces problems of its own, its troubles show that economic weakness is beginning to seep into the broader advertising sector.

From 38 percent in the first quarter — already a significant slowdown since the middle of last year — Snap’s revenue growth plummeted to 13 percent in the second.

Of even more concern, according to several analysts, was the news that Snap hasn’t posted any growth so far in the current quarter. Wall Street had projected an 18 percent expansion for that period.

Advertising on Twitter, meanwhile, fell 1 percent year over year, in contrast to the 11 percent growth analysts had expected.

After the Snap shock that came hours earlier and given the turmoil caused by Elon Musk’s aborted takeover bid, Twitter disappointment made for less of a surprise, although underscoring the overall slowdown.

Meta shares fell nearly 8 percent in response, while Alphabet, Google’s parent company, fell 6 percent. In contrast, Twitter’s stock price rose slightly, reflecting Wall Street’s continued belief that its merger deal with the company will either force Musk to go through with the acquisition or pay a sizable severance payment.

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

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

Shifts in consumer behavior have also contributed to business uncertainty, Enberg added, particularly driven by the rise of TikTok, which has come out of nowhere to capture a large chunk of social media audiences.

But it was mounting signs of economic weakness that were responsible for the chill that spread across the digital ad sector on Friday.

In particular, Snap pointed to a combination of rising inflation and supply chain pressures — exacerbated by the war in Ukraine — that has greatly increased advertiser costs. That, in turn, had prompted them to cut back on advertising in the face of slacking profit margins. It also blamed rising interest rates, which would have faced some of its advertisers with higher capital costs, which would also have prompted them to pull out.

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

Snap’s advertisers, for example, include an unusually large number of startups in areas like cryptocurrencies and online broking that rely on venture capital to stay afloat. That makes the pullback an echo of the dot-com crash of two decades ago, when venture capital contraction hit startup advertising.

Another difference, according to Thill, is that many of Snap’s advertisers are just beginning to experiment with their ads, making it easy to trim them down. Since Snap and Twitter each make up a small portion of the online advertising market, they’re also likely to suffer disproportionately as advertisers consolidate spending onto fewer, larger platforms, Enberg added.

Google’s search advertising is expected to be a relative bright spot, though the company still faces a difficult comparison to a year ago when revenue fell 62 percent due to the pandemic slowdown.

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

For Meta, meanwhile, a number of factors, including competition from TikTok and the lower level of advertising generated by the Reels feature, had many analysts already predicting that its most recent quarter’s revenue would be, at best, only on par with last year. Because Facebook’s parent company relies heavily on advertising from small and medium-sized businesses, it could come under particular pressure in a downturn, Enberg said.

The evidence that digital advertising spend can fluctuate so wildly has rocked the entire sector. The online auctions that companies like Snap use to sell ads are designed to make it easy for customers to quickly increase their spend if a particular campaign proves effective. But they also make it easy to withdraw.

“If it’s easier to turn it on, it’s easier to turn it off,” said Jeremi Gorman, Snap’s chief business officer. As a result, digital advertising is registering a change in the economy faster than other forms of advertising, according to Snap executives.

“There are no contracts, there are no big upfront payments,” Thill said. “It just turns itself off,” added Thill.

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