Meta gains are not a good sign for the ad market

Facebook main goal (GOAL) reported its fourth quarter 2022 earnings on Wednesday, and Wall Street apparently loved the look of things on the world’s largest social network. Shares of the company rose more than 27% on Thursday, after Meta beat revenue and earnings expectations.

And what is more, CEO Mark Zuckerberg announced The company is undergoing an “efficiency year” and slashed capital and operating expense expectations for the year as it approves a $40 billion share repurchase.

That’s all well and good for Meta, but the outlook for the social network’s advertising business, which accounted for $31.2 billion in revenue out of its $32.1 billion in revenue last quarter, remains incredibly cloudy. You’d think with the sense of Meta euphoria emanating from the Street that the company’s advertising woes were behind it, but that’s not the case.

The company’s advertising revenue fell year-over-year to $31.2 billion in the fourth quarter of 2022 from $32.6 billion in the same quarter last year.

During Meta’s fourth-quarter earnings call, Chief Financial Officer Susan Li outlined what kinds of problems the company continues to face.

“Fourth-quarter revenue remained under pressure from weak advertising demand, which we believe continues to be affected by the uncertain and volatile macroeconomic outlook,” he said.

MENLO PARK, CA - DECEMBER 29: The Meta (Facebook) sign is seen at their headquarters in Menlo Park, California, United States, on December 29, 2022. (Photo by Tayfun Coskun/Anadolu Agency via Getty Images )

Meta is cutting spending, but that doesn’t mean the overall ad market is improving. (Photo by Tayfun Coskun/Anadolu Agency via Getty Images)

While Meta says that the investments it has made in its ad platform are helping advertisers, the company still faces ad targeting issues caused by Apple (AAPL) App tracking technology privacy feature. The offer, which launched in 2021, allows consumers to opt out of allowing third-party apps like Facebook or Instagram to track their activity on the web and other apps.

“We continue to make progress in mitigating the impact of the [App Tracking Transparency] change, but this is, more broadly, just the reality of the online advertising environment we now operate in,” Li explained. “So we continue to work on creating tools that mitigate the impact of those changes and we see strong adoption of those tools.”

It’s not just Meta either. During Snap (SNAP) earnings call, CEO Evan Spiegel told analysts that the demand for advertising has not improved, but it has not worsened “significantly” either. The CEO blamed the problem on advertisers managing their budgets at a time of economic uncertainty.

Microsoft (MSFT) also reported weakness in its advertising business, CFO Amy Hood explained during the company’s latest earnings report.

“Ad spend was down a bit more than expected, impacting LinkedIn’s news and search advertising and marketing solutions,” Hood said. And while news and search ad revenue increased by 10% additional acquisition costs to traffic were lower than the company had anticipated.

The ad market may also take some time to fully recover. In a recent research note, Jefferies analyst James Heaney says Street is overly optimistic about industry growth in 2023 and 2024.

“Our assumptions are based on the fact that global ad spend and GDP are highly correlated and [Jefferies] Economists are forecasting a recession from Q3 ’23 to Q3 ’24,” Heaney wrote. “We expect another round of estimate cuts in the fourth quarter as companies provide more negative guidance than expected for the first quarter and FY23.”

For now, Meta shares are up. However, how long that lasts is an open question.

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