Facebook and Google face skeptics on Wall Street this week amid digital ads collapse

Wall Street is bracing for disaster in online advertising.

Following disappointing results from Snap last week and a 28% plunge in the stock price that sent the company’s value to its lowest since early 2019, investors are now turning their attention to ad giants Meta and Alphabet as well as reports this week from Twitter and Pinterest. They’ll also hear from Amazon and Microsoft, which have big ad businesses of their own.

The flurry of reports comes at a time of extreme skepticism in web and mobile advertising. Facebook parent Meta shares are down more than 60% this year, and the company is expected to report a second straight drop in revenue. Alphabet, which has slid 30% in 2022, is forecast to report single-digit sales growth. Aside from one quarter at the beginning of the pandemic, that would mark the weakest period for Google’s parent since 2013.

The economic downturn and fears of a recession have many marketers reining in spending. At the same time, Apple’s iOS privacy change from last year continues to punish companies — notably Snap and Facebook — that have historically relied on user data to target ads.

“Sentiment in the online advertising space has softened of late, with more anecdotes of budget cuts as well as advertisers holding back some budget in hopes of a 4Q flush,” UBS analysts wrote in a report last week. “Looking into ’23, we think planning amidst this level of macro uncertainty sets the stage for below-consensus growth in ’23, even if macro does not significantly deteriorate from here.”

UBS said it would “reduce estimates and price targets across the online advertising group” due to both the economic environment and a strong U.S. dollar. Through discussions with digital ad agencies, the analysts said they learned that “many advertising directors are pulling back certain budgets, particularly among smaller advertisers.”

In Snap’s report on Thursday, the company said results are being hit by a combination of platform changes, economic challenges and competition. For a second straight quarter, Snap said it wouldn’t be providing guidance for the coming period because of difficulty in predicting the economic trajectory.

“We are finding that our advertising partners across many industries are decreasing their marketing budgets, especially in the face of operating environment headwinds, inflation-driven cost pressures and rising costs of capital,” Snap said.

If the third quarter mirrors the second, Snap’s brutal report could spell dismal results for its industry peers. In July, Meta, Twitter, Pinterest, and Google all reported weaker-than-expected results following Snap’s miss.

Investors started planning ahead last week, sending Pinterest shares down more than 6% on Friday after Snap’s report. Twitter fell almost 5% and Meta dropped more than 1%. Alphabet rose over 1%, but still underperformed the tech-heavy Nasdaq, which jumped 2.3%.

CNBC’s Jim Cramer and the Investing Club said there’s a chance Snap’s poor results won’t reflect the overall online advertising market. Meta and Alphabet “have built multifaceted digital ecosystems” that dwarf the smaller Snap, thus making those companies “more immune from weaker digital ad spend,” the Investing Club wrote.

The industry drama this week isn’t limited to earnings reports.

Tesla CEO Elon Musk has until Friday to close his proposed $44 billion acquisition of Twitter if he wants to avoid a trial. After changing his mind on the deal multiple times and being sued, Musk said earlier this month that he wanted to complete the transaction at the originally agreed upon price of $54.20 a share. Twitter wants to make sure the financing is in place before backing off the lawsuit.

Twitter shares closed last week below $50, suggesting investors still aren’t convinced the deal will close. Meanwhile, the business has been struggling. Analysts are anticipating a drop in third-quarter revenue in the company’s earnings report, which is expected this week.

One bright spot in the online advertising space could be Amazon after its digital ad business grew 18% in the second quarter, topping all of the major players in the industry.

While retailers may be pulling back on spending on Facebook and elsewhere, Amazon is a stickier platform for them because people who use it are shopping for stuff. For companies to keep their brands visible on the largest e-commerce site, they have to pay the platform.

But even Amazon’s core business has suffered this year, with growth slowing dramatically from its boom days during the pandemic. Overall revenue expansion was in the single digits for three straight quarters and the stock is down 28% for the year.

By the time Amazon closes out Big Tech earnings week on Thursday, investors should have a much clearer picture of the online ad market and how much companies are tightening their belts heading into the holiday season.

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