May 26, 2022

StrategisChhr

Skillful Business Crafters

Why the Winners and Losers of Meta’s Earnings Will Become Clearer Today


Facebook
‘s parent company is definitely one of the most unfriended on Wall Street right now.


Meta Platforms
(ticker: FB), which owns Facebook, Instagram, and WhatsApp, is seeing its stock go into freefall. The shares were more than 22% in lower in premarket trading Thursday. If the shares finish more than 18.96% lower in regular trading in the day ahead, it will be the worst one-day plunge for the stock in the company’s history.

To blame are the company’s latest quarterly financial results. 

While sales came in ahead of estimates, earnings were weaker than expected and the group’s guidance was truly dismal: Revenue is expected to come in between $27 billion and $29 billion in the current quarter. Representing comparatively anemic annual growth of 3% to 11%, it’s not what’s usually expected from the company.

Meta cited headwinds from a number of factors, key among which was lower user impressions hitting advertising dollars. Meta also saw issues with pricing that stem from disruptive new rules that


Apple
(AAPL) has introduced for mobile ads, as well as lower ad budgets as businesses face cost inflation and supply chain disruptions.

Wall Street will be closely watching what happens next, and not just because it could have a wider impact on the stock market. Two questions, raised by Barron’s Eric J. Savitz on Wednesday, need to be answered: Is social media use in decline generally, or just at Meta? And is ad spending dropping, or just shifting away from Facebook?

We may have some clarity on those two questions today. Social media peers


Snap
(SNAP) and


Pinterest
(PINS) are set to report earnings after the close, and could give clues as to whether Meta’s issues are isolated to Meta—or if there will be broader winners and losers.

Is Social Media in Decline?

“We expect continued headwinds from both increased competition for people’s time,” Meta said in its earnings release.

It’s possible that people are using social media less with the darkest days of the Covid-19 pandemic behind them. More likely is that there’s a new kid on the block: TikTok, the video-based social media powerhouse owned by China’s ByteDance.

Expected to hit ad impressions in the current quarter, Meta said, is “a shift of engagement within our apps towards video surfaces like Reels, which monetize at lower rates.” Meta’s inability to monetize video at the same rate as it does other elements, like Feed and Stories, is a Meta problem. But the fact that it’s even chasing a video strategy suggests a desire to catch up with Tik Tok.

These are similar pressures to those felt by Snap, whose Snapchat platform has a large overlap with the TikTok user base. Snap stock was downgraded last week by broker and investment bank Wedbush, with analysts citing TikTok’s audience share putting Snap’s engagement and ad dollars at risk.

As for


Pinterest,
the image sharing platform, it has faced its own problems with declining engagement, earning itself a similar downgrade last month amid data showing that users had left the platform.

Snap and Pinterest earnings Thursday will hopefully shed more light on current social media trends. The problem: If both companies see declines in engagement and a weaker outlook, it could be hard to identify a coherent reason why, if one exists. 

The fact that TikTok’s parent company is private makes understanding whether that platform is seeing a massive boom at the cost of Facebook, Snapchat, and Pinterest more difficult.

Analysts at Swiss bank


UBS,
led by Lloyd Walmsley, said their view was one of “a world broadly moving away from Meta’s strengths, as content consumption shifts towards creator content and private messaging and away from public sharing, effectively eroding the company’s moats.”

Is Mobile Advertising Sunk?

Meta’s warning that businesses were reducing ad budgets didn’t ring quite true. After all, Google and YouTube parent


Alphabet
(GOOGL) posted blowout earnings this week on the back of strong advertising.

Instead, what may be at the root of Meta’s pricing problems are rules introduced last year by


Apple,
which require apps on its operating system to make users opt-in to advertising tracking. It’s not a popular choice, and media companies have suffered as a result of not being able to provide advertising clients with thorough data on ad impacts. 

One of the reasons behind Snap’s downgrade was expected headwinds to revenue from these changes. Snap’s earnings could further cement the narrative that it and Meta, which are heavily reliant on direct-response mobile ads, are in for an uphill battle.

Who Might Be the Emerging Winners and Losers?

Assuming that social media use at-large is not in decline, it’s likely that ByteDance and its winning TikTok formula will continue to pose a challenge to Meta and Snap, and, perhaps to a lesser extent,


Twitter
and Pinterest.

On the advertising front, it could get more complicated. Meta and Snap look poised for a tough fight to keep ad dollar growth in the face of Apple’s new regime, as does Pinterest. Snap stock was down 16% in the U.S. premarket Thursday and Pinterest fell more than 9%.

As Barron’s reported last year, when the impacts of the new rules become more widely known, Twitter may be relatively buoyant because it relies more heavily on brand advertising. In addition,


Amazon
(AMZN) could be a winner because it has its own ad ecosystem, and could snap up direct-response advertisers who may be looking to shift away from Meta and Snap. 

Alphabet could benefit from the same trend as


Amazon
; the company’s earnings, at least, suggest it won’t be a loser—it relies on advertising via its dominant Google search platform and via YouTube.

More immediately, a spate of advertising infrastructure stocks are getting slammed.


Trade Desk
(TTD) was down 7% in the U.S. premarket, with


Magnite
(MGNI) falling 5.5% and


PubMatic
(PUBM) 5% lower.


Roku
(ROKU), which relies on targeted advertising, but not on Apple’s platform, fell more than 4%.

Write to Jack Denton at [email protected]

https://www.barrons.com/articles/why-the-winners-and-losers-from-metas-bombshell-earnings-will-become-clearer-today-51643894709