Ahead of brands slowing down their marketing spending, Meta is warning that it will be cutting back to prepare for tough times.
"We have reduced our hiring and overall expense growth plans this year to account for the more challenging operating environment while continuing to direct resources toward our company priorities," the company noted in an earnings release.
Meta recorded its first revenue rate drop in the company's history when it reported its latest earnings on Wednesday. Revenue for the quarter was $28.8 billion, marking a 1 percent decline year-over-year. Refinitiv analysts were expecting $28.9 billion. Earnings per share came in at $2.46 versus the $2.59 estimate.
"The market has spoken and advertisers are skittish amidst a cloud of economic uncertainty," Mike Proulx, Forrester vice president and research director, said in an email. "Let's face it, ad spend is under scrutiny right now and that translates to marketing executives making tough decisions on where to spend their limited budgets. Facebook and Instagram were once the place for brands to be but that's simply not a sure bet anymore, especially for brands looking to reach Gen Z."
The average price per ad dropped 14 percent year-over-year as well.
"On the one hand, it's good news for advertisers as ads are getting cheaper," Jasmine Enberg, Insider Intelligence principal analyst, said. "But the lowered prices are also negatively impacting Meta's bottom line, and that's reflected in its Q2 revenue decline."
The company warned of continuing advertising headwinds in the upcoming quarter, similar to other digital advertising-reliant companies like Snap, Twitter, and Alphabet. Meta revised its revenue projections for the third quarter to $26 billion to $28.5 billion, which is lower than the $30.5 billion Refinitiv analyst estimate. If it hits those targets, it will be the second quarter in a row the company would have a declining revenue rate.
Adding to Meta's growing woes are concerns competitors could be taking away from its market share. Meta currently makes up 22.3 percent of the U.S. digital ad market according to Insider Intelligence and is the second-largest digital advertising platform in terms of advertising spend. But companies like TikTok threaten its dominance especially among youth, forcing the company to make changes to its apps to make it more like its competitors.
Instagram, in particular, has been scrutinized for pivoting to more video and more suggested accounts, away from static photos and posts from people that users follow. Instagram CEO Adam Mosseri addressed the controversy on Twitter, saying that the video changes were here to stay especially as it noticed more Instagrammers engaging with the format.
"It's likely that some of the hubbub will blow over," Insider Intelligence's Enberg said. "But while Instagram goes after the coveted teen audience that is gravitating toward TikTok, it could alienate its core users and creators. That could pose a long-term problem for usage and engagement if Instagram's bet on attracting younger audiences doesn't match expectations."
Meta also noted its growing metaverse division Reality Labs will likely make less money than it did this past quarter. The division made $452 million this past quarter but spent $2.8 billion dollars. The company recently announced it was raising the price of the Oculus 2 headset by $100.
"Facebook — excuse me, 'Meta' — is a legacy media company attempting to pivot into the metaverse and has made a big bet on one piece of hardware," Kenneth Landau, metaverse platform Mytaverse CEO and co-founder, said.
But investors shouldn't rule out the metaverse just yet just because Meta is warning of a slowdown, he adds.
"Saying the metaverse is doomed because Facebook hasn't made money yet with one approach is akin to saying Google will fail because Yahoo had a bad quarter in 2003," Landau said. "Based on the number of Fortune 100 companies contacting Mytaverse to use our metaverse enterprise technology, the metaverse's prospects as an enterprise SaaS look pretty bright, recession, or no recession."