Even after a more than 50% year-to-date decline, the going could get even tougher for digital advertising platforms like Meta, Snap, and YouTube, according to a note from Barclays.
The Wall Street firm said "a perfect storm" has arrived for the digital advertising space that could translate into limited upside for the companies impacted in the near-term.
That perfect storm encompasses a three-part combination of factors that are adding to Barclays' concerns about the advertising space. According to Barclays, those factors include:
1. "A step-down in spend and conversions across the whole internet ecosystem (ex-travel) in the second quarter."
2. "Ascending trajectory from new challengers like TikTok and Apple, which are taking share at a time when macro is weakening materially."
3. "The obvious tough comparisons which are well documented."
"We think this cocktail of events is likely to generate the lowest growth rate for the sector in years," Barclays said, adding that current valuations only partially reflect this scenario. Barclays expects 3% year-over-year growth for the industry this year.
That's a marked slowdown from prior years when strong consumer spending habits drove strong demand for different advertising solutions. But as fears of an economic recession continue to rise, this years-long trend is starting to slow down.
Barclays expects second-quarter earnings from digital advertisers to see muted reactions from investors, and lowered its price target considerably for Meta, Snap, Alphabet, and Pinterest.
"Is there enough ad spend to go around in 2022? We think no," Barclays said, arguing that strong growth from TikTok's and Apple's budding advertising businesses will capture 33% of every incremental ad dollar in 2022.
Apple's advertising business, which includes its app store ad placements, has grown to about $7 billion, while TikTok is on pace to grow its advertising revenue from $4 billion to more than $12 billion this year, according to the note.
"This begs the question of who is slated to lose out? We think it's likely 'everyone' with growth figures from Snap, Meta, YouTube and the open web already reflecting some of the beating," Barclays said.
Barclays cut its price target for Meta and Snap to $280 and $20, respectively. Those levels represent limited upside for the stocks, and are nowhere near their peaks in 2021.
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