Ad-supported internet equities have underperformed in 2022, harmed by a combination of Apple (AAPL) privacy law revisions for tracking iPhone users' actions, increased competition from TikTok, and a weaker consumer economy. Meta (META) Platforms CEO Mark Zuckerberg allegedly informed his staff last week that the firm is facing a severe slump that would necessitate a reduction in employment and investment plans.
The sector's financial results for the June quarter are now the focus. Investors and analysts are prepared for dismal earnings and forecasts; the issue is how much of that has already been included in stock prices.
In a research note published Tuesday, Barclays analyst Ross Sandler stated that the firm is facing a "perfect storm." This includes a "step-down" in online advertising expenditure and conversions, increased competition from TikTok and Apple (AAPL), and difficult year-over-year comparisons.
The analyst reduced his price expectations for the whole group. He reduced his Meta (META) objective to $280 from $370; Alphabet (GOOGL) aim to $3,000 from $3,200; Pinterest (PINS) target to $20 from $24; and Snap (SNAP) target to $20 from $42. Sander reduced earnings and sales forecasts for all four firms for the second quarter and the entire year 2022.
Sandler has Overweight ratings on Meta, Alphabet, and Snap but has an Equal Weight rating on Pinterest.
"We believe this confluence of circumstances will result in the sector's lowest growth in years," he adds. The good news, according to Sandler, is that "valuations already reflect part of this" and that the quarter's estimated cutbacks should lay the ground for the business to normalize.
Sandler adds that the three major ad vendors — Meta, Alphabet, and Amazon.com (AMZN) — have taken "more than 100 percent" of additional advertising revenue in recent years. To put it another way, the strong have been becoming stronger. However, the analyst expects a different situation in 2022.
TikTok, he says, is on track to make $12 billion or more in revenue this year, more than tripling its revenue from 2021. He also mentions that Apple is " tiptoeing into the digital ad arena," with a potential income of more than $7 billion this year. Sandler predicts that TikTok and Apple will grab a third of every additional ad dollar spent in 2022. He names Meta, Snap, and Alphabet's YouTube as losers in that scenario.
According to Sandler, the group's earnings multiple has already dropped by around 30%. This compares to 50% compression for large-cap internet domains during the 2009 slump, implying "we are well over halfway there."
On Tuesday, all four social media stocks are gaining ground, with Snap and Pinterest up 6%, Meta up 3%, and Alphabet up a tiny 2%.
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