Weakness in consumer spending has led to cutbacks in the digital advertising businesses for behemoths Meta (META), Alphabet (GOOGL) and Comcast (CMCSA), signaling a weaker outlook for the remainder of 2022.
The advertising budgets of companies have started to contract as GDP declined for a second consecutive quarter and consumers are faced with elevated rates of inflation. The economy contracted by a much-worse-than-expected 0.9% during the past three months ending in June, the second consecutive quarterly decline.
Mark Zuckerberg Says Economic Downturn Is Here
Meta Platforms reported the social media group's first-ever quarterly revenue decline and said more competition and a slump in ad sales would tamp down growth for the next quarter.
"We seem to have entered an economic downturn that will have a broad impact on the digital ad business," Mark Zuckerberg, META's CEO said on Wednesday. "It's always hard to predict how deep or how long these cycles will be but I'd say that the situation seems worse than it did a quarter ago."
The parent company of Facebook said profits for the three months ending in June dipped by 31% to $2.46, missing Street forecasts. Revenue slipped 3% to $28.82 billion.
Some advertisers have chosen other social media platforms such as TikTok.
"We exist in a really competitive advertising market where advertisers have broad opportunities to advertise both offline and online and there are almost endless options," outgoing COO Sheryl Sandberg told investors on a conference call Wednesday. "So we know we have to earn our share and continue to deliver great ROI and be able to measure results."
Alphabet Has Fewer Dollars
Alphabet also signaled a slowdown as advertising dollars fell below expectations.
Youtube's advertising revenue increased by only 4.8% over one year to $7.34 billion. Analysts expected $7.52 billion. In addition to a possible dip in budgets allocated for online advertising, Youtube is competing for marketing dollars against Instagram and TikTok.
"The quarter on quarter deceleration in both YouTube and network advertising revenues primarily reflects pullbacks in spending by some advertisers," CFO Ruth Prorat said during the call with analysts. "We do view that as rather idiosyncratic. Some of it is supply chain some of it is inventory. And so just working through that and then I would say, there were a couple of other factors that were relevant."
Google's overall ad revenue growth rate slowed to 11.6% to $56.3 billion.
Investors have been concerned that Youtube and Google's advertising revenue would be hurt by shrinking promotion and marketing budgets for companies bracing for tougher economic conditions. Online advertising spending is typically one of the first areas that companies slash during economic slowdowns.
Investors should expect more contraction in the third quarter.
"In YouTube and network, the pullbacks in spending by some advertisers in the second quarter reflects uncertainty about a number of factors that are challenging to disaggregate within other revenues in the third quarter," Prorat said. "We expect an ongoing headwind from the fee changes and the slowdown and buyers spend that impacted results in the second quarter."
Comcast Boosted By Political Ads
Comcast also acknowledged that advertising budgets are being affected.
The media and entertainment company reported in its second quarter earnings that ad revenue grew only by 1.2% when political advertising was stripped out in its cable communications division.
Overall advertising revenue increased by 10.2%, primarily driven by increases in political advertising and by its advanced advertising businesses, as well as advertising from its Xumo streaming service.
TikTok Is Culprit
Internet companies are facing greater competition from TikTok, a video streaming company that is owned by Beijing-based technology company ByteDance, for both advertising dollars and the attention of users.
Consumers are turning towards TikTok due to its shorter videos instead of spending their time watching YouTube's longer videos, ad industry analysts said.
TikTok is hurting YouTube by stealing top creators and cannibalizing consumer viewing times," Needham analyst Laura Martin wrote in a research note, adding that the results show broader ad weakness and could also be bad for Meta.
