The Online Ads Crisis Won’t Be A Blip For Google, Facebook, Others

Online advertising was already not having a great year. But things are getting worse, and Wall Street may be underestimating just how much.

The combined weight of macroeconomic factors such as rising interest rates, the war in Ukraine and rising inflation took some wind from the online advertising market in the first quarter. And the situation has become even more tense since then, with inflation alone jumping to a multi-decade high in May.

said at the end of May that “the macroeconomic environment has definitely deteriorated more and faster than expected,” prompting the company to warn that second-quarter pretax revenue and profit were lower than expected that he had given a month earlier.

It was a worrying sign midway through the quarter, and the CEO of Meta Platforms

mark zuckerberg

closed the period with a similar sentiment. In an all-hands meeting with employees last week, Zuckerberg said the

Facebook

META 1.43%

Parent cuts its engineer hiring target for the year by 30%. He also called the current situation “one of the worst downturns we’ve seen in recent history”, according to a Reuters report. Facebook’s ad business is dwarfing that of Snapchat, and analysts currently expect the social media giant’s ad revenue to show no year-over-year growth in the second quarter for the first time in the world. history of the company.

But Facebook isn’t the only one feeling the pain. Combined ad revenue for Meta and Google-parent

Alphabet,

GOOG 3.55%

with

To babble,

TwTR 1.52%

To break

Pinterest

SPINDLES 2.74%

and the advertising segment of

Amazon,

AMZN 1.75%

is now expected to rise 9% year-over-year to $97.2 billion in the second quarter, according to consensus estimates from FactSet. This is a notable slowdown from the 17% growth recorded in the first quarter and would be the slowest growth since the second quarter of 2020, when the onset of pandemic-related lockdowns led to a sharp decline advertising for travel and other key sectors.

The individual results of the aforementioned six companies are expected to reflect the slowdown in the second quarter, although macroeconomic factors do not weigh on all of them equally. Google’s core search arm still makes up the bulk of its advertising business and has so far proven to be more resilient than other segments. So, Google’s total advertising revenue for the second quarter is expected to increase 12% year-over-year to $56.7 billion.

Facebook, on the other hand, is still dealing with the impact of changes to

AppleEast

AAPL 2.40%

iOS platform last year. And TikTok’s growing influence may also take a bigger bite. In a report released last week, eMarketer predicted TikTok’s global ad revenue to exceed $11.6 billion this year, up 200% from last year and surpassing Snap, Twitter and Pinterest in overall size. TikTok also competes with Google’s YouTube, which is expected to see ad revenue growth slowing to 8% year-over-year in the second quarter after averaging 42% over the past four quarters.

Wall Street currently expects ad growth to pick up in the second half. But with more and more leaders and pundits predicting a recession on the horizon, that prospect looks increasingly tricky. And the resilience of the modern online advertising industry in a sustained global recession has yet to be truly tested.

In a report published last week,

JP MorganEast

Doug Anmuth

noted that digital advertising accounted for approximately 12% of total ad spend during the financial crisis period of 2008-2009. That compares to 67% last year, “making online spending much more exposed to broader macroeconomic trends,” he wrote. This time the industry will have to pick up more than a few clicks to recover.

As markets react to inflation and high interest rates, tech stocks are off to their worst start to the year on record. The WSJ’s Hardika Singh explains why the sector — from tech giants to small startups — is being hit so hard. Illustration: Jacob Reynolds

write to Dan Gallagher at [email protected]

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