The digital ad sector is finally on the mend, recovering from the ‘dark days’ of 2022.
Advertising is back.
Following a severe 2022 in which brands reduced expenditure to cope with inflation, and a 2023 marked by layoffs and cost cuts, the major digital advertising companies have resumed solid growth.
Meta, Snap, and Google revealed first-quarter results this week, with revenue growth exceeding analysts’ expectations and reaching rates not seen in at least two years. Their financial performance was mostly driven by advances in their advertising operations.
The corporations entered earnings season in a good position because their results would be comparable to historically bad periods. However, investors and analysts were cautious in their predictions, citing political and economic volatility in several regions throughout the world, as well as the persistent issues created by high consumer costs.
Meta, the first in the group to announce results, allayed some concerns on Wednesday, reporting a 27% increase in first-quarter revenue to $36.5 billion. It was the most rapid growth rate for Facebook since 2021.
“When Meta was in its darkest days two years ago, the company knew what they had to do to get back on track,” wrote Bernstein analysts in a note following the earnings release. “To their credit, Meta defended the core.”
The dark age was characterized by macroeconomic issues and Apple’s iOS privacy shift, making it difficult for social media businesses to target users with adverts. Meta lost two-thirds of its value in 2022 and was forced to significantly reduce workforce.
Meta responded by revamping its ad system with significant investments in artificial intelligence, allowing it to give value to brands despite the bottleneck set by Apple. By 2023, the stock had almost tripled.
While the company’s first-quarter results above expectations, shares fell on Thursday as CEO Mark Zuckerberg focused his post-earnings speech on Meta’s many spending initiatives outside of advertising, particularly the metaverse.
“We’ve historically seen a lot of volatility in our stock during this phase of our product playbook where we’re investing in scaling a new product but aren’t yet monetizing it,” Zuckerberg said on the results call late Wednesday.
Bernstein analysts, who recommend purchasing the stock, said Meta’s ad sales were driven by strength in online commerce, gaming, entertainment, and media, and that ad demand in China “remained strong.” Meta has profited from an increase in spending by Chinese cheap merchants such as Temu and Shein.
“Without sounding overly religious, you either believe in Zuck or you don’t, and we do,” the analysts stated in their report.
‘Incrementally positive’
Alphabet followed on Thursday, posting $61.66 billion in ad revenue for the first quarter, a 13% increase over the previous year, with YouTube ad income rising 21% to $8.09 billion. The corporation as a whole climbed 15%, a rate not seen since 2022, and the stock surged 10% on Friday, the strongest rally since 2015.
During the quarterly call with investors, Alphabet finance chief Ruth Porat stated that the company is “very pleased” with the growth of its ad businesses.
Citi analysts noted in a note on Friday that the broader advertising environment is “clearly strengthening,” citing accelerated growth in Google Search and YouTube.
“We emerge from Q1 results incrementally positive on shares of Alphabet,” the analysts wrote, keeping their buy recommendation.
Snap’s stock skyrocketed 28% on Friday after the firm reported a 21% gain in revenue to $1.19 billion, the highest growth in two years. In each of Snap’s previous six quarters, sales either increased or decreased by a single digit.
According to its investor letter, the company is seeing more demand for its ad platform and benefits from a better operating environment.
In a research published on Friday, Deutsche Bank analysts said Snap produced a “much-needed” beat and that its ad stack is back on track. The analysts, who have a buy rating on the stock, stated that investors are “most encouraged by the ad platform investments, which are showing increasing promise.”
Despite the rebound, Snap shares remain down 14% for the year.
Next week, investors will gain a better understanding of the digital ad sector with reports from Pinterest and Amazon, two major players in the industry. On May 7, Reddit will publish its first earnings since its IPO in March.
