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Stop us if you’ve heard this lately – but a deep dive with advertising agencies focused on small/medium businesses by RBC Capital Markets sees some “cracks starting to form” on overall ad spend.
That leads to estimate cuts (and reduced price targets) for key digital-ad players.
“Bottom-line, we found clear signs of cracks forming on overall spend though interestingly, SMB weakness seems very much yet to fully run its course, indicating potentially more persistent risk to 2H estimates,” analyst Brad Erickson said.
There are competitive aspects affecting the leaders as well, he noted. In the near term, spend on TikTok (BDNCE) is likely to get cut before that on Google (NASDAQ:GOOG) (GOOGL), or even Meta Platforms (NASDAQ:META), as it’s less critical to revenue generation, Erickson noted. Still, there are “noticeable” ad platform and scalability improvements at TikTok that are negative for Meta longer term, he said.
Respondents among the agencies pointed to the general slowdown in e-commerce growth, and RBC now figures a COVID-19 pull-forward effect amounting to three years means that e-commerce growth could be stuck in the single digits not just for a few quarters, but for a few years. And with only 25% of SMBs having cut spend so far, there’s a lot of room for more reductions if inflationary pressures persist, Erickson said.
The flip side of TikTok’s competitive effect on Meta is that there’s been no real signs of improvement in Facebook Reels monetization/conversion so far – “not great, considering META is now delaying its rev-share with creators until 2024 vs. 2023 and suggests both content and engagement must gain better critical mass before that monetization can better ramp,” Erickson said.
There are some positives in the agency talks, including the low rate of SMB cuts so far (showing some stable business trends), and the resilience of mission-critical revenue channels, along with some promised IDFA-related algorithm improvements at Meta.
But the firm already cut its estimates on Snap (SNAP) last month (before the company’s stock-tanking guidance warning), and now those reductions have landed for Snap’s rivals. RBC cut its price target on Meta (META) to $200 from $240 (implying 18% upside), and reduced its target on GOOGL to $2,700 from $3,420 (14% upside).
Amazon.com (NASDAQ:AMZN) sees its price target cut to $144 from $175 (24% upside), and Pinterest (NYSE:PINS) to $23 from $26 (7% upside).
By contrast, Jefferies analyst Jared Weisfeld said Friday that “very real concerns” about falling ad spending at Meta (META) have been priced into Meta stock.
