After disappointing earnings reports from Twitter and Snap, it's become evident to investors just how much social media companies rely on ad revenue. Angelo Zino, the senior equity analyst at CFRA Research, joined Cheddar News to break down this week’s numbers from tech platforms — and what to look for going forward.  "We'll get a better indication here when Meta and Alphabet reports," he noted. I'd be a lot more concerned about Meta than Alphabet at this point in time now."

Closing Bell

Social Media Earnings Show Heavy Reliance on Advertising Revenue

Welcome back to cheddar news, it's closing bell. Everyone hold social media stocks moving lower today after some disappointing earnings from snap and twitter. And we're seeing just how much these companies rely on advertising. Well snap and twitter reporting, decreasing demand for advertising as marketers pull back on spending, sending investors running and wiping away billions of dollars from the social media sector. So we'll see if the trend continues as we do approach metas second quarter earnings release next week. It's a larger company so it does have a bigger impact on the path forward for the major indexes. But joining me now to discuss what this means for the social media space is Angelo Zino, senior equity analyst at C. F. R. A Research Angelo. It's good to see you what were your big takeaways from these reports? Yeah, I mean, listen, I think nobody was necessarily surprised that, you know, that we were going to see some softness within kind of the the broader ad space. But I think kind of the biggest takeaway here is the magnitude of kind of the pullback we're seeing and how rapid this is happening. Right? So, um, you know, Q two results ultimately were okay. But as we kind of go into Q three here specifically, it looks like kind of the, the ad spaces at the very least, coming to a halt that actually looks like when it's all said and done is probably going to see a year over year decline, which I think is it was, it wasn't even, you know, thought of as a possibility come, you know, a couple of months ago, but I think really important here is, you know, snap kind of alluded to some of this stuff when they essentially pre announced back in May. But again, I mean, as we, when we kind of look at the run rate here from May june into july now, um it just seems like the situation is getting a lot worse. And the problem with that also is going into the second half of the year. I think there was some hope out there that we were going to see easier comparisons, right? Because those, some of those IOS changes, um that that took effect mid last year, we're now going to get fully lacked some of those post pandemic numbers after a year we're going to get lapped. So we expected to see some easier comes, but that's not helping at all going into the second half this year. So let's talk about what has changed these past few months. I think it was a shocker to some to hear Evan Spiegel say three months ago when the company last reported that Russia's invasion of Ukraine, which directly impacts the global supply chain, but doesn't directly impact ad dollars was the reason that we saw a slowdown three months ago in the first quarter of this year. What's changed in these past three months, that's causing advertisers to pull back and take some caution, You know, i it's just it's just the deterioration within the broader economy, I think. I mean essentially you've got advertisers out there that you know, especially in an inflationary environment right? Um course are going up across essentially um across every single company out there and companies need to kind of maximize and execute on the profitability side of things. And the first place you take it right is of course on the ad side of things, it's just the easiest way to do it and that's why you're in the magnitude and how quickly it's happening. Um it's pretty amazing here. And just as quick as we kind of saw the upside over the last two years. I mean you're just kind of seeing the cutbacks happen just as rapidly here over the last couple of months. So we think that's kind of the biggest reason it's it's more along the lines of what's happening on the broader macro side of things. I think it will be interesting to kind of see how things evolve when meta and alphabet report next week. Right. I mean we're talking about snap and twitter that just reported combined, they both represent less than 5% of the total digital ad market. So we'll see kind of, you know, we'll get a better indication here when meta and alphabet reports. I'd be a lot more concerned about meta than I would at AlFA than alphabet at this point in time now. How important Angelo our meta and alphabet, the parent company of google to add spend, what's the share that they take in this space. And what might these reports from twitter and snap pretend about what could come from their own results. Yeah, I mean as far as um you know, meta and alphabet are concerned, I mean combined they're both well over 50% of the total digital ad market. So they're absolutely enormous companies, right? Um and you know, specifically they're very different companies in nature too and have different drivers within them. But specifically as far as alphabet is concerned, um you know, they essentially got a monopoly on the search side of things, right? And the belief is that that should hold up a lot better or should be cut essentially last among kind of all the the the cutbacks within the ad side of things. So um as far as Q two is concerned and going to the Q three, I'd expect alphabets numbers to hold up a little bit better. The concern on meta side of things I think is we've kind of um you know, they've had challenges kind of growing on the user side of things and when you kind of look at the numbers here from both snap and twitter um the actual user numbers actually held up very well. It was the fact that we kind of saw a big cutback in in terms of the bids that were announced for a lot of these kind of, you know ads that were placed and that's gonna crunch, I think I met a lot more than it will probably anybody out there because the users have really come to a halt there. So that's kind of how I'm thinking in terms of meta and alphabet at this point in time. And then, you know, as far as snapping, twitter is concerned. I mean, listen, um, I think they were going to tell, I think they're a great indication of what's going to happen here on, on the broader kind of side of things as far as digital ad spend is concerned, but again, probably bigger implications for meta as well as for Pinterest as someone who covers the social media space very closely and the stocks, Angelo, what's it gonna take to turn the ad spend around? What's your forecast? When could these companies be back in growth mode? Listen, I think it all depends on how things, you know, evolved from a macro side of things, but at this point in time were kind of expecting things to kind of be weak here through the first half of next year, I'd say as far as the mark on the margin side of things. Um, and you'll hear a lot of what snap just said last night, in the sense that a lot of these companies are going to pull back in terms of um, you know, investing and, you know, essentially, you know, coming out with a halt in terms of new hires and even amidst all that, op X is probably going to continue to outpace the top line here over the next couple of quarters. So I'd expect margins within the industry, probably the bottom out sometime in the first half of next year. And I think at that point in time you can start talking about a recovery within the broader space. Alright, Angelo Zino, senior equity analyst Ed CFR Research and Angela thanks so much for coming on the show.