Are the glory days over for the platforms?

Things were already looking ugly for the digital ad market after all of the major ad platforms reported worse than expected Q1 results last month, citing macroeconomic headwinds including the war in Ukraine, inflation, Apple’s privacy changes and supply chain issues. 

That storyline took a turn for the worse this week, when Snap warned the market and employees of another rough quarter in Q2. The announcement late Monday sent the social media platform’s stock value plummeting by nearly half (-40%), and dragged Pinterest (-23%), Meta (-8%), Google (-6%), Twitter (-4%) and even Amazon (-2%) down with it.   

Ad tech stocks were hit as well, with players like The Trade Desk and PubMatic down 20% and 15%, respectively. 

“The macroeconomic environment has definitely deteriorated further and faster than we expected when we issued our guidance for the second quarter,” Snap CEO Evan Spiegel said at JPMorgan’s global technology, media and communications conference on Monday. 

According to analysts, Snap’s warning is less of an issue specific to the company than a canary in the coal mine for the entire digital ad industry, which has essentially seen nothing but explosive growth since its inception.

A note from Jeffries, for instance, states that Snap’s outlook is “indicative of a rapidly deteriorating macro environment that will likely impact the whole ad industry.” The firm is lowering its targets for Meta, Google, Snap, Twitter, The Trade Desk, PubMatic and Integral Ad Science by between 3% and 6% as a result of Snap’s ominous outlook.

UBS also told investors that it sees Snap’s downgrade as a risk to estimates “for Snap and the digital ad space as a whole,” particularly in 2023. 

And Morgan Stanley attributed Snap’s downgrade to “weakening business conditions” that are “leading to lower ad spend” across verticals, adding that brand advertiser spend is more exposed to cut backs than direct response spend. “We expect all online ad platforms to feel some impact of a significant consumer pullback.”

To the contrary, other sources show that ad spend remains strong across verticals, especially industries such as travel and tourism that are making a post-pandemic comeback. Gartner, for instance, revealed in a study on Monday that marketing budgets are actually rising as a percentage of total company revenue, up to 9.5% from 6.4% in 2021, across almost all industries. 

Advertisers also tend to benefit from inflationary trends, as media spend is often budgeted as a percentage of total revenue. If companies are raising prices, and consumers are willing to spend, that can translate into more budget for advertising. 

To me, these inconsistencies indicate that a renewed focus on consumer privacy and broad crackdown on online ad tracking are having an outsized impact on the platforms’ digital ad businesses. 

Things are likely to get worse for the platforms as Apple continues to clamp down on ad tracking. The tech giant is expected to reveal iOS 16 at its Worldwide Developers Conference, kicking off on Monday June 6, which will impose even further ad tracking restrictions on its software.

“It's something I think that the entire industry is grappling with and we may never fully recover all signals,” Spiegel said of Apple’s tracking changes at the JPMorgan conference. 

“I think the bigger challenge is just trying to build that familiarity and trust with these new solutions, because it's a big change in terms of the way that advertisers have been

thinking about measuring their return on investment over the last 10 years.”

Another theory is that the ad platforms are simply maturing businesses that don’t have much room to grow their share of the pie as rapidly as they have been able to in the past. 

Regardless of the reason, it’s clear that the digital ad platforms are facing some serious macro challenges. With TikTok taking on a larger share of advertising budgets, and the dawn of Web 3 on the horizon, to what extent shifting advertiser priorities will reshape the market remains to be seen. 

What is clear is that as the platforms struggle to maintain their historic growth rates and see their valuations slashed, hiring is slowing and employees will see their personal stock compensations decline – and perhaps look for other places to grow their careers and their wealth.