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Facebook's stumbling advertising business at the heart of Big Tech's revenue

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The Meta Platforms logo will be seen on May 22, 2022 in Davos, Switzerland.

Arnd Wiegmann | Reuters

It’s a profitable Paloza Week for Big Tech, with four of the most valuable US companies and Meta all reporting quarterly results.

Alphabet and Microsoft will take action on Tuesday, and Apple and Amazon will finish things on Thursday. Between them is Wednesday’s meta.

Investors in all five names have been hit this year as inflation surges, rising interest rates and concerns about a recession have hit the tech sector. Among the megacap groups, Meta is suffering the most, losing half of its value as Facebook’s struggling advertising business has yet to show signs of recovery.

When Meta reports second-quarter figures, Wall Street looks carefully for signs that growth is ready to recover. We also need to see an improvement trend for users who fled the company’s apps in favor of rivals like TikTok in the last quarter.

“They are starting to get tired of it,” said Debra Aho Williamson, an analyst at research firm Insider Intelligence. “Users are definitely attracted to other platforms or less involved with Facebook. Advertisers really start to pay attention when they start to see more and more of it.”

Facebook is expected to show its first-ever year-on-year decline in earnings in the second quarter, and analysts expect a modest acceleration in the third quarter with mid-single-digit growth. The mood of the mobile advertising industry is heading towards reporting.

Last week, Snap reported disappointing second-quarter results, lacking revenue and revenue, and announced plans to delay hiring. Snap has blamed the difficult economy and changes in Apple’s iOS privacy as significant hurdles, in addition to competing with TikTok and other companies.

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

“They aren’t growing, but so far they haven’t actually fallen off the cliff,” said Crockett, who holds hold ratings for both stocks.

From the user’s point of view, Snap is more durable. The company said last week that its daily active users reached 347 million, up 18% year-on-year. According to FactSet, Facebook’s DAU increased 4% in the first quarter to 1.96 billion, and analysts expect that number to remain. This is an increase of about 3% over the previous year.

“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, making it difficult for advertisers to target users. Much of Facebook’s value to marketers is its ability to target and track users across multiple third-party sites.

This year’s share price has fallen 50%, with Meta’s market capitalization below $ 500 billion, less valuable than Big Tech’s peers, as well as Tesla, Berkshire Hathaway and UnitedHealth.

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

Earnings were shy to estimate when Meta last reported the results. CEO Mark Zuckerberg said some of the challenges were due to iOS changes and “a broader macro trend, such as the softening of e-commerce after acceleration seen during a pandemic.”

The rise of TikTok poses an increasing threat to Facebook and Snap. This is because popular short video apps are getting caught up in the lucrative market of 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 glasses.

According to CCS Insight analyst Leo Gebbie, Meta is now the leader in the early Metaverse space. Based on a recent survey of VR and AR conducted by Gebbie’s company, Meta emphasizes the importance of its investment and marketing efforts, as most people are related to the Metaverse idea.

However, the Metaverse is still mainstream and years away from potentially profitable. Gebby said he intends to determine if Zuckerberg is spending a lot of time calling for revenue to discuss the future Metaverse, or if he is focusing on tackling the real-world challenges of Meta.

“There is no doubt that more focus will be placed on talking about Meta being a wise company,” Gebby said.

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