Meta is defeating Snap ads in Digital: Here’s why

The online advertising market is recovering. But the spoils are not divided equally.

After Half blew away Wall Street estimates last week in its fourth-quarter earnings report, pushing the stock to a smaller, record-breaking rival Hurried It turned short on Tuesday, sending investors racing for the exit.

Meta’s advertising business, which includes Facebook and Instagram, grew 24% from a year earlier, putting the company at its fastest rate of expansion since mid-2021. Snap was up just 5% on year-on-year basis, the sixth consecutive quarter of single-digit growth or decline in sales. That’s slower than advertising growth Google, Amazon AND Microsoft as well as Meta.

Based on investor reactions, Snap is headed for one of its worst days on the market since its debut seven years ago. The stock fell 33% in extended trading to $11.75. Its two biggest daily drops were a 43% drop in May 2022 and a 39% plunge two months later.

Meta, by contrast, rose 20% on Friday after the company reported a tripled profit, beat top-line and earnings estimates, issued an upbeat forecast and announced it is paying a dividend for the first time.

“We’re seeing bigger companies get bigger and smaller companies are slower to recover,” said Jasmine Enberg, principal analyst at Insider Intelligence. “Snap is one of those” in the latter camp, she said.

For the first quarter, Snap expects revenue of between $1.095 billion and $1.135 billion, which would equate to growth of about 11% to 15%. The middle value of the range – $1.115 billion – was just below analysts’ average estimate of $1.117 billion.

Overall, the digital advertising market is recovering from a brutal 2022, when soaring inflation and rising interest rates led brands to rein in spending. Now advertising platforms are seeing improvements thanks to a more stable economy along with upcoming events like the 2024 Olympics in Paris and presidential elections later this year.

As Enberg noted, “the rebound has been uneven” and has benefited Meta and other tech giants like Alphabet and Amazon, all of which reported double-digit advertising growth for the fourth quarter.

During Snap’s earnings call on Tuesday, CEO Evan Spiegel answered questions from analysts about why the company is lagging behind the competition.

Rich Greenfield of LightShed Partners asked Spiegel whether Snap’s smaller size compared to Meta represents “a key long-term issue.” Spiegel responded by saying that Snap is “certainly one of the largest internet services” and, while some platforms are larger, “I think there’s tremendous opportunity for us to continue to grow our business.”

Barclays analyst Ross Sandler asked Spiegel: “Why don’t we see further progress and bring the growth rate up to the levels of the broader digital advertising industry?”

Spiegel began his response by expressing his excitement about “the progress we are seeing especially in our lower-funnel business,” referring to the improved features of its online advertising platform.

However, he acknowledged a certain level of disappointment.

“Obviously we would like to move faster,” Spiegel said. “But we’re working as hard as we can and you know we’re pleased with what we’re seeing in the direct response business.”

Both Meta and Snap have been hit hard in 2022 due to the weakening advertising market Apples iOS privacy update, which made it harder for social media companies to target users. Both companies said they were rebuilding their ad tech in response and told investors they were pouring money into artificial intelligence.

Meta is seeing the benefits, triggered by a surge in spending by Chinese retailers, who are trying to reach the company’s billions of users around the world. Meta has 2.11 billion daily active users, compared to Snap’s 414 million.

Spiegel echoed comments from previous quarters and said Snap is “investing heavily” in machine learning and artificial intelligence technologies to improve its online advertising platform.

Enberg told CNBC that, based on feedback from advertisers, Meta is further along in its development. And the company’s size offers a built-in advantage.

“Meta platforms are much larger than Snapchat, which means they have more data and users to work with as they rebuild it,” Enberg said. “Snap has clearly made progress, and we saw some of it in its earnings, both this quarter and last quarter, but it appears the company is taking longer.”

Snap has recently tried to distance itself from the broader social media universe and presents itself more as a messaging company, Enberg said. The company revealed sales of its Snapchat+ subscription service for the first time and said it has an annualized revenue run rate of $249 million in 2023. The service now has 7 million subscribers, up from 5 million in the previous quarter . Snap launched the product in 2022 for $3.99 per month.

But revenue from subscriptions is currently minimal. Advertising is still what matters, and “the reality is that it competes for the same social dollars,” Enberg said.

“I think the level of investor confidence in Snap is about the future,” he said.

CLOCK: Meta is too optimistic about revenue and cost growth in 2024.