Watch Meta's earnings report for a peek at online ads

Digital advertising-dependent tech companies were especially hurt by Wall Street's worst year since 2008.

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Despite year-over-year sales growth in consecutive quarters, the Facebook parent Meta lost almost two-thirds of its value in 2022, leading the company to lay off 13% of its workforce in November as a result of year-over-year revenue declines. There was a significant decline in Snap's stock price of 81% as growth fell into the single digits and the company opted not to provide a forecast for two consecutive quarters. Snap announced in August that it would be laying off 20% of its employees as a result of its restructuring.

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After a devastating year in 2022, the online advertising sector is starting to have a rebound in financial performance that is expected to occur at some point in 2023, after a brutal year in 2022. They’re hoping for some signs of a recovery this week as the biggest companies in the space report fourth-quarter results and provide an update on whether brands are starting to spend more on ads after pausing many of their campaigns.

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It is expected that Snap will release results after the close of trading on Tuesday. Meta will release results on Wednesday, followed by Alphabet on Thursday. Additionally, there will be a presentation on Thursday from both Amazon and Apple, which have both grown their digital ad businesses that have been capturing market share from Google and Facebook for quite some time now.

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The market analyst expects more turmoil ahead for online advertising in the coming months, as concerns of a potential recession continue to loom large. Cowen recently published a survey of 50 ad buyers, which revealed that companies expect their spending to increase just 3.3% in 2023, a figure that Cowen called “the softest ad growth outlook we have seen in five years.” Last year, those companies increased their spending by 7.5%.

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As part of their budgeting process, two-thirds of ad buyers factored in a recession, citing inflation and a softening consumer as among other macroeconomic factors, Cowen concluded.

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Additionally, companies relying on mobile data for ad targeting are still facing upheaval brought about by Apple, despite the macro challenges. In 2021, the iPhone maker instituted a new App Tracking Transparency (ATT) feature, which reduced the ability of advertisers to target consumers by limiting access to a smartphone user identifier. According to Meta early last year, AT&T's revenue for the entire year of 2022 would drop by $10 billion.

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Meta's stock dropped in extended trading following its most recent earnings call, and CEO Mark Zuckerberg thanked investors for their patience as he acknowledged a multitude of headwinds including the economy, ATT, and competition.

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Zuckerberg said: "I believe that those who are patient and make an investment with us will be rewarded," he said. As of right now, there have been a few rewards to be had in 2023. Despite the fact that January is drawing to a close, Meta and Snap are both up over 22%. It is not expected that revenue growth will pick up until the second half of the year, so we'll have to wait a bit longer.

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The Definitive research firm predicts that Snap will grow by less than 1% in the fourth quarter, followed by an expansion of 1.6% for the current period.

'Little rebound'

In its third straight quarter of declines, Meta is expected to report its steepest drop yet, with its ad business being more than 20 times the size of Snap's, according to Refinitiv, with a decline of more than 6% - the biggest drop it's ever seen. A further decline of 2.8% in revenue is expected in the first quarter, followed by a return of sub-1% growth in the second quarter.

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Meta has been working on improving its advertising technology since April 2021, when Apple's ATT update came into effect. Meta is also making use of data from other sources to improve its advertising technology. The CNBC report stated that some retailers have been porting their customer data from their Shopify websites to Meta's platforms, which has increased the ability of Meta to target personalized ads at users more effectively.

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"There are some signs that Facebook might be experiencing a little bit of a turnaround in its ad spending," said Debra Williamson, an analyst at the research firm Insider Intelligence, a research firm that specializes in online marketing.

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TikTok, on the other hand, has enabled consumers to switch from stagnant updates to short videos, and Facebook has been slow to catch up with TikTok. Facebook and Instagram, on the other hand, are nowhere near making up for the loss of privacy they suffered after Apple announced its privacy changes as a result of its ad system improvements, regardless of Meta's incremental improvements.

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There have been a number of challenges Facebook has had to overcome in order to come up with its own tools and metrics to be able to prove the effectiveness of those ads," Williamson said. As I mentioned earlier, I think Facebook is getting better at doing this, so I am hopeful that we will see a bit of a rebound from the past couple of quarters, compared to what we have seen in the past few years."

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Apple's moves have not adversely affected Google's business as much as Apple's, but the economic slowdown and the rise of TikTok are still having a negative impact on Google's business. There is a strong expectation that Alphabet's growth by the fourth quarter of 2022 will be below 1%, while it will build slowly in 2023, not reaching double digits until the last quarter of the year.

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Cowen analysts predicted TikTok would gain the largest share of Digital Video advertising over the next two years among existing players. According to their estimates, TikTok will capture 8% of budgets by 2024, up from 6% last year.

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Additionally, Amazon's advertising business has also been making significant inroads, as e-retailers are increasingly willing to pay big bucks to promote their brands on the company's site and across the various services it offers. It has been reported that Amazon controlled 13% of the digital advertising market last year and that its ad business grew by 25% in the third quarter, despite the fact that overall revenue missed estimates as well.

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FactSet says Amazon's ad unit will grow 17% in the fourth quarter, well ahead of its peers, and remain in the mid-teens through 2023.

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Then there is Netflix, whose revenue stream has been expanded with the addition of advertising. Earlier this month, Netflix debuted a new ad-supported streaming tier that costs $6.99 a month and is monetized by ads.

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By 2024, Netflix's share of digital video ad budgets is expected to reach nearly 4%, Cowen analysts predicted.

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Barton Crockett, an analyst at Rosenblatt Securities, said the shaky economy is the biggest uncertainty over this year's online ad market. Based on FactSet's research, he has a hold rating on Meta, Snap, Amazon, and Netflix, but recommends that investors buy Alphabet and Apple in the near term.

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The good news is that if the economy improves, "things that are very economically sensitive, like advertising, will be an attraction for investors across the spectrum," Crockett said. There are probably a lot of people in this group who will benefit from that.

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There is a lot at stake here, and it is a risky bet. Consumer spending dropped 0.2% in December, indicating that people are still holding on to their cash, according to the U.S. Department of Commerce's report last week.

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“It will be almost impossible for there to be any kind of meaningful expansion in ad spending in such a situation,” Crockett said.