Advertising business can’t improve ‘until broader economy stabilizes’: Tech analyst

Piper Sandler Senior Internet Analyst Tom Champion joins Yahoo Finance Live to discuss social media stocks, the state of the advertising business, and the outlook for Google.

Video Transcript


BRAD SMITH: Welcome back to “Yahoo Finance Live,” everyone. As investors continue to flee social media stocks, Piper Sandler is out with downgrades on both Snap and Pinterest on concerns about the worsening advertising market and competition from teen favorite TikTok. Joining us now is Piper Sandler Senior Internet Analyst Tom Champion.

When you see a pullback in any type of advertising dollars or digital marketing dollars from companies in such a wave like we are right now, what does that, perhaps, entail for some of these companies that you’re covering here that are extremely, extremely dependent on those ad dollars continuing to flow in?

TOM CHAMPION: Yeah, we just have to peg expectations at a very cautious level. There’s a lot of uncertainty out there. What we saw from Snap two weeks ago was that they pre-announced the second quarter, and they said growth was going to fall below the low end of their guidance range they set for the second quarter. They forged those expectations just a month prior. So it’s a very dynamic environment, and it’s changing to the worse.

JULIE HYMAN: And what’s interesting about, Tom– it’s Julie, here– is that you say typically these stocks don’t re-rate until after the digital ad market has bottomed. And that’s saying something considering how far these stocks have already fallen. So how do we figure out when the market– the digital ad market, that is, bottoms?

TOM CHAMPION: Right. Well, we have to see evidence to the contrary that it’s not continuing to deteriorate. So if advertising is a lagging indicator and a lagging business to the economy, right now what we’re seeing is inflation concerns, higher interest rates, potentially a consumer that is pulling back, and that will have knock-on effects on the ad space , we believe.

So, until the broader economy stabilizes and finds a floor, we don’t think the advertising business can improve. And right now, our macro team here at Piper Sandler is quite cautious on the economy, thinking it may not bottom– it may not rebound until next year. So for us, we had a relatively sanguine outlook on the ad space coming into this year that just no longer makes sense. And we decided to get more cautious.

BRIAN SOZZI: Tom, are investors not appreciating the power and growing influence of TikTok?

TOM CHAMPION: It’s a great question because TikTok’s an unknown at this point. It’s very large. It’s growing very fast. You’ve seen Mark Zuckerberg talk about it on Facebook earnings. But they’re not public, so they don’t report every quarter. It’s a little uncertain what their financial results look like and the impact.

So what we’re seeing is the second derivative impact on names like Facebook, in terms of what management is saying at the quarter and, potentially, maybe a more profound impact on Snap.

BRAD SMITH: For a company like Alphabet, and particularly Google and YouTube, where they see the majority of their revenue coming in from and on those advertising spends, have we seen anything in the data to suggest that even if there are still spends taking place, it’s for a smaller portion– or smaller size? And with that inventory, that turnover– even with TikTok, as we were mentioning a moment ago– is there another platform that becomes kind of the de facto for a cheaper run campaign that is still effective?

TOM CHAMPION: Yeah. It’s a great question because the changes that Apple has made over the last year have significantly altered advertising campaigns and processes. And both the platforms and the advertisers are still gaining their footing in this new environment. And it’s created a lot of uncertainty in pricing and efficacy for much of digital media.

I think– our view is that Google is the best house in maybe a deteriorating neighborhood, that all our checks indicate that the product continues to improve. We hear great things about Performance Max, that the efficiency and ROI that Google is producing remains extremely strong, that their sales efforts and their consultative approach with clients is very, very helpful.

So, as it stands in our outlook, we continue to rate Google overweight. We think it’s the– we are most constructive on Google with respect to the entire space.

JULIE HYMAN: You know, it’s interesting because what you’re talking about is execution, that Google in some ways is doing it better. But I wonder as well when you’re looking at the differentiator for a Google, if there’s also more value now than ever to being the biggest tent, if you will. In other words, when I think about a Snap or a Pinterest, it’s a more targeted audience. Is it more appealing to advertisers at this point to have that wide exposure to a big audience?

TOM CHAMPION: It’s a great point. I totally agree. I think it is plausible that during the pandemic and in an immediate pandemic aftermath when there was huge amounts of incremental advertising spend that materialized from e-commerce and these various spaces that benefited during the pandemic, that potentially Snap and Pinterest over-indexed on the incremental spend.

As spend normalizes, it is consolidating back to the mega platforms. Google is certainly one of those. I think Facebook is perhaps better positioned now that spend is normalizing. They are simply extremely large. You kind of can’t be there in a lot of ways. And so while Google is the best place to be right now– they’re executing extremely well– I think the situation may be improving for Facebook as well and scale is a huge part of that.

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