The Imbalanced Recovery of the Online Ad Market

The online ad market is rebounding, but the recovery is far from equal. Meta, the parent company of Facebook and Instagram, saw its ad business grow by an impressive 24% compared to the previous year, leading to its fastest expansion rate since mid-2021. In stark contrast, Snap, the smaller rival, reported a meager 5% increase year-over-year, marking its sixth consecutive quarter of either single-digit growth or a decline in sales. This growth lagged behind not only Meta but also industry giants such as Google, Amazon, and Microsoft. The market’s response to Snap’s performance was swift, with investors quickly exiting and causing the stock to plummet by 33% in extended trading.

Snap’s recent decline is not unfamiliar territory for the company. It experienced its two largest one-day drops in May and July of 2022, with declines of 43% and 39% respectively. Comparatively, Meta has been soaring, with a 20% surge in stock value after reporting a tripling in profit, surpassing estimates on both the top and bottom lines, offering an optimistic forecast, and even introducing its first dividend payment. Analysts like Jasmine Enberg, principal analyst at Insider Intelligence, point out that the larger companies are rebounding faster, leaving smaller players like Snap struggling to catch up.

A Disappointing Projection

Snap projected a revenue range of $1.095 billion to $1.135 billion for the first quarter, implying growth between approximately 11% and 15%. However, the middle of the range, which amounts to $1.115 billion, fell just short of analysts’ average estimate of $1.117 billion. This projection indicates that Snap faces an uphill battle to match the growth rates seen across the broader digital ad industry.

While the digital ad market overall is recovering from a challenging year in 2022, it is far from a uniform rebound. The instability caused by soaring inflation and rising interest rates led many brands to reduce their advertising spend. However, the market is now on a path of improvement, driven by a more stable economy and upcoming events like the 2024 Olympics in Paris and the upcoming presidential election. Yet, as Jasmine Enberg mentions, this recovery has been uneven, primarily benefiting larger tech companies such as Meta, Alphabet, and Amazon. All three reported double-digit growth in ad revenue for the fourth quarter, while Snap struggled to keep up.

During Snap’s recent earnings call, CEO Evan Spiegel faced tough questions about why the company is falling behind its competitors. Analysts inquired whether Snap’s smaller size compared to Meta represents a long-term issue. Spiegel responded by highlighting that Snap is already one of the largest internet services and has tremendous growth potential. However, Ross Sandler, an analyst at Barclays, questioned why Snap is not making more significant progress to match the growth rates seen in the broader digital ad industry. Spiegel acknowledged some level of disappointment and expressed a desire for faster growth. Nonetheless, he emphasized the positive developments in their direct-response business while also shedding light on Snap’s heavy investments in machine learning and AI technologies to enhance their online ad platform.

Both Meta and Snap experienced challenges in 2022 due to a weakened ad market and Apple’s iOS privacy update, which made it harder for social media companies to target users. In response, both companies are investing heavily in rebuilding their ad technology and pouring resources into artificial intelligence. Meta is witnessing the benefits, particularly from increased spending by Chinese retailers seeking to reach the billions of users on their platforms. With 2.11 billion daily active users on Facebook compared to Snap’s 414 million, Meta’s size and data advantage play a significant role. According to Enberg, Meta’s progress is ahead of Snap’s primarily due to its larger platforms, allowing for more extensive data and user engagement.

Snap has been trying to distinguish itself from the broader social media landscape by positioning itself as more of a messaging company. It recently disclosed sales figures from its Snapchat+ subscription service for the first time, boasting an annualized revenue run rate of $249 million in 2023. The service has gained 7 million subscribers, up from 5 million in the previous quarter. However, revenue from subscriptions remains minimal, and Enberg asserts that advertising remains the central revenue driver. Investors’ confidence in Snap’s ability to compete for advertising dollars is a pressing concern moving forward.

The recovery of the online ad market highlights a clear disparity between industry leaders and smaller players like Snap. Meta’s impressive growth shows the benefits of being a massive tech company, while Snap struggles to catch up. As the market continues to evolve, Snap will need to address its growth rates and prove its ability to compete in the ever-competitive digital ad industry.

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