Meta and Google have reported outstanding performance, but why is the market not buying it?

Zhitong
2023.10.26 07:25
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The global digital advertising market has finally recovered from its painful slump! However, investors in the US stock market are still concerned that economic downturn and geopolitical turmoil will plunge the industry back into chaos.

According to the latest performance announced this week by the three giants of the advertising industry in the United States, Meta Platforms (META.US), Snap (SNAP.US), and Alphabet (GOOGL.US), the global digital advertising market has finally recovered from the painful downturn. However, investors in the US stock market are still concerned that economic downturn and geopolitical turmoil will plunge the industry back into chaos.

The overall performance announced by the three advertising giants this week is optimistic, showing that overall advertiser spending has increased compared to the same period last year. For an industry that has experienced more than two years of turmoil, this should be a very welcome sign. After all, these companies have had to deal with reduced online marketing spending after the COVID-19 pandemic, macroeconomic uncertainty, and changes in Apple Inc.'s privacy policy, which have reduced the effectiveness of advertising on smartphones.

Although the performance of the three advertising giants exceeded expectations, investors are still worried.

Now these three advertising industry giants appear to be even stronger. Meta's total revenue exceeded expectations and stated that it will continue to grow for the rest of the year. Snap's performance can be described as "exceeding expectations across the board," and the company's Q4 outlook also exceeded expectations, with overall sales recovering after two extremely difficult periods. Although its cloud business performed poorly, Alphabet's Google search advertising revenue and overall revenue exceeded market expectations.

These transformations have not been easy. These companies have significantly reduced costs, restructured their advertising businesses, and limited new spending to what they consider more reliable areas, such as generative artificial intelligence.

However, warnings from executives about the macroeconomic situation have caused stock prices to decline after the performance announcements. For example, after Meta, the parent company of Facebook, Instagram, and WhatsApp, released better-than-expected quarterly reports and optimistic performance guidance, the company's stock initially rose by more than 5%.

As the second-largest advertising industry giant after Google, Meta's largest source of revenue, its advertising business, achieved accelerated growth in the second and third quarters after consecutive year-on-year declines in the first quarter. Meta's advertising revenue in the third quarter reached $33.6 billion, a year-on-year increase of 24%, nearly double the growth rate of the first quarter, while the average analyst expectation was about $33 billion.

However, Meta's CFO Susan Li stated during the conference call with analysts that the company's future looks unpredictable, and when the performance in 2024 is susceptible to macroeconomic conditions, the stock price instantly gave up all gains after hours and fell by more than 3%.

"We are very susceptible to macroeconomic fluctuations." "The revenue outlook for 2024 is uncertain," said Susan Li, CFO of Meta, during a conference call with investors.

Economic concerns weigh on investor sentiment, causing stock prices of digital advertising sellers to decline

Snap, the developer of the "disappearing" Snapchat app, is facing a similar situation. The company has spent most of this year adjusting its advertising business and finally saw a recovery in overall performance in the previous quarter. However, when announcing its earnings on Tuesday, Snap stated that there is limited visibility on revenue for the remaining time of this year.

One of the sources of uncertainty for these advertising giants is the war between Israel and the Palestinian Hamas organization. Snap stated that a "significant" number of advertising campaigns were paused during the third quarter after the conflict began, and this delay may continue into the fourth quarter. Therefore, the company believes that providing formal guidance for the current quarter would be a "cautious" decision.

Due to concerns from Wall Street institutions and individual investors about the company's prospects, Snap's stock price fell 5.4% during regular trading hours on Wednesday. Shyam Patil, an analyst at Susquehanna Financial Group, said, "Given that it may take some time to address investors' recent concerns, we remain cautious." He rates the stock as "neutral."

Market aversion to "uncertainty"

The cautious views of company executives on the future development of their companies are usually aimed at managing expectations. Publicly traded companies tend to provide more conservative performance forecasts unless it is during a period of robust economic growth. However, in the eyes of tech stock investors, this conveys a sense of pessimism, which largely reflects their aversion to the term "uncertainty" during periods of macroeconomic instability.

Regarding the optimistic performance of Meta, Snap, and Alphabet, as well as the cautious expectations provided by Meta executives, Angelo Zino, an analyst at CFRA Research, shares the same concerns. "I would say that the environment we are in right now is one where investors are increasingly concerned about macro/geopolitical/regulatory uncertainty," the analyst said.

For Alphabet, its advertising business is closely tied to the mature and dominant search business, and investors are looking for other sources of revenue growth. On Tuesday, disappointment in the cloud computing division overshadowed its incredibly strong advertising business. Despite total sales exceeding analyst expectations by about $1 billion and search ad revenue reaching $44 billion, a YoY growth of 11.3% and far surpassing analyst expectations, the company's stock price plummeted 9.5% during regular trading on Wednesday, marking the largest single-day decline since 2020. The performance expectations of digital advertising sales companies are closely watched because their revenue prospects depend on whether businesses have enough confidence to invest in marketing. Factors such as high inflation, the Ukraine issue, the Gaza war, and persistently high interest rates are all unfavorable.

Angelo Zino commented, "These factors are closely related to the health of the economy."

Digital advertising also provides clues related to the holiday shopping season, when marketers often increase their spending. Amazon, which has been expanding its advertising business, is expected to provide investors with a clearer understanding of holiday consumer demand when it announces its performance after the market closes on Thursday.

Meta, Snap, and Alphabet all use digital advertising revenue to support investments in new AI technologies. Therefore, if the advertising market weakens, it may make it more difficult for companies to invest heavily in AI innovation and other major investments. Although investors reward stocks that perform well in the field of artificial intelligence, their support decreases when a company's main source of income is at risk.

Meta's CFO, Susan Li, acknowledges that stable profits are crucial for Meta to maintain its ambition. She stated at the earnings conference, "We recognize that over time, we must achieve the ability to invest in all new technologies, including AI, by achieving comprehensive operating profit growth."