Meta’s earnings aren't a great sign for the ad market

Facebook parent Meta (META) reported its Q4 2022 earnings on Wednesday, and Wall Street seemingly loved the look of things at the world’s largest social network. Shares of the company rose more than 27% Thursday, after Meta beat on revenue and earnings expectations.

What’s more, CEO Mark Zuckerberg announced the company is undergoing a “year of efficiency” and cut capital and operational expenditure expectations for the year while approving a $40 billion stock buyback.

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 of its $32.1 billion revenue last quarter, is still incredibly cloudy. You’d think with the sense of Meta euphoria emanating from the Street that the company’s ad troubles were behind it, but that’s not the case.

Ad revenue for the company fell year-over-year to $31.2 billion in Q4 2022 from $32.6 billion in the same quarter last year.

During Meta’s Q4 earnings call, CFO Susan Li, laid out just what kinds of problems the company continues to face.

“Q4 revenue remained under pressure from weak advertising demand, which we believe continues to be impacted by the uncertain and volatile macroeconomic landscape,” she said.

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

While Meta says that investments it has made into its ad platform are helping advertisers, the company is still contending with ad targeting problems caused by Apple’s (AAPL) App Tracking Technology privacy feature. The offering, which rolled out in 2021, allows consumers to opt out of letting third-party apps like Facebook or Instagram from tracking their activity across the web and other apps.

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

It’s not just Meta, either. During Snap’s (SNAP) earnings call, CEO Evan Spiegel told analysts that advertising demand hasn’t improved, but it hasn’t gotten “significantly worse, either.” The CEO chalked the problem up to 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.

“Advertising spend declined slightly more than expected, which impacted Search and news advertising and LinkedIn Marketing Solutions,” Hood said. And while Search and news advertising revenue increased 10% ex-traffic acquisition costs, it was lower than the company had anticipated.

It may take some time for the ad market to fully recover too. In a recent research note, Jefferies analyst James Heaney says the Street is overly optimistic with regards to growth in the industry in 2023 and 2024.

“Our assumptions are based on the fact that global ad spend and GDP are highly correlated and [Jefferies] economists forecast a recession from Q3’23 — Q3’24,” Heaney wrote. “We expect another round of estimate cuts in Q4, as companies provide more negative-than-expected guidance for Q1 and FY23.”

For now, shares of Meta are on the rise. How long that lasts, though, is an open question.

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