The revenue season in the digital advertising space is behind us, and it could have been worse, observes Bernstein Research – but it has more new questions than answers following the reports.
The second quarter is unlikely to change a bearish narrative in space, says analyst Mark Shmulik, despite some surprises – such as “Meta (NASDAQ: META) becoming ex-growth,” and the number of employees is actually growing despite the widespread hiring freeze.
There were five key takeaways from the impressions of the season, Shmulik said — led by the fact that digital ad spend growth is slowing overall, for everyone in the space.
“More surprisingly, the growth range of our coverage was closely tied to the underlying macro-conditions – digital ad spend is slowing with a lag from e-commerce – as the likely culprit, compounded by the continued effects of changes in Apple’s IDFA,” he said.
Even so, there was a bit of a divergence in performance as the companies reported a slowdown in an advertiser pool – “which we interpret to mean unprofitable technology with a rising cost of capital.”
Shmulik doesn’t yet know how cyclical digital advertising is, but he’ll take the initiative to say that search advertising is more defensive, noting the strong performance of Google Search (NASDAQ:GOOG) (GOOGL) and Amazon ads (NASDAQ: AMZN), which state “(1) price-conscious consumers are speeding up product search queries in search of better deals and (2) advertisers are continuing to shift their spend down the funnel with known consumer intent. “.
As for everyone’s race to catch up with TikTok (BDNCE), “short video is a self-inflicted headwind in a soft market,” Shmulik said. Gamers are seeing near-term revenue pressure as they scale up in the space – Reels from Meta (META), Shorts from YouTube (GOOG) (GOOGL), Spotlight from Snapchat (NYSE: SNAP) and Ideas Pins from Pinterest (PINS). All are experiencing strong growth in engagement, but with a limited ad load.
And his message to investors is “users don’t care about your feelings.” In another year, “we’d be impressed with user growth everywhere outside of Pinterest (PINS)”. Social media names haven’t returned as many pandemic-fueled gains as expected, he said.
Shmulik has outperform ratings on Alphabet (GOOG) (GOOGL), Amazon.com (AMZN), Meta Platforms (META) and Snapchat (SNAP), and market ratings on Pinterest (PINS) and Twitter (TWTR).