Mark Zuckerberg, CEO of Meta Platforms, stated Wednesday on Wednesday's company's second quarter earnings call that the economy appears to be in a downturn. This will impact digital advertising. The Facebook parent company must do more for less. The comments came after Meta, which runs advertising-dependent social networks Facebook and Instagram, disclosed second-quarter earnings and revenue that came in below analysts' estimates. Snap and Twitter, social media rivals, reported lower-than expected quarterly results last week. On a conference call with analysts, Zuckerberg stated that engagement trends on Facebook were generally stronger than expected and that strong Reels growth was continuing to drive engagement across Facebook. However, it seems that we have entered an economic downturn which will have a wide impact on the digital advertising industry. Although it's difficult to predict the depth and duration of these cycles, I would say that it seems worse than it did one quarter ago. On Wednesday, the U.S. Federal Reserve increased its benchmark rate by 75 points. Fed Chair Jerome Powell stated that consumer spending growth has slowed significantly. He said that he does not believe the U.S. is currently in a recession and that the National Bureau of Economic Research had not yet ruled out a possible recession. However, that has not stopped Meta, Alphabet, Google's parent company, and other tech companies from cutting back on their hiring plans. "This is a period which demands more intensity and I expect us get more done with less resources," Zuckerberg stated. The company revealed to media outlets in May that it would be reducing its headcount growth. Zuckerberg explained more on Wednesday's conference phone. He stated that our plan was to gradually reduce headcount growth in the coming year. Many of our teams will shrink to allow us to shift energy to other areas within the company. I want to give our leaders the power to decide where they should double down, backfill attrition, or restructure their teams. Sheryl Sandberg, Facebook’s outgoing operating chief, stated that Russia's invasion in Ukraine and normalization of ecommerce after a Covid explosion continue to hinder the company's growth. "Despite these challenges, I am very optimistic for the long-term." Sandberg added. While we are currently facing a cyclical downturn in the digital advertising market, it will grow over time. Advertisers will choose the place that offers them the best return on their investment and allows them to drive their businesses. We are confident that we will continue to be a very competitive advertising option compared with other options.
2. Meta shares fall after disappointing earnings reveal a host of headwinds
Meta shares closed at 5% on Thursday, one day after the company's second-quarter earnings. The results were disappointing. Meta's revenue dropped almost 1% compared to a year ago, and the shares have lost approximately half of their value since 2022. Meta also released a disappointing third quarter forecast. CEO Mark Zuckerberg stated on a conference call with analysts that the company would reduce its headcount to prepare for the economic slowdown. "This is a period that requires more intensity and I expect we will get more done using fewer resources," Zuckerberg said. He said that the "economic downturn" will have a wide impact on digital advertising, which has been already affected by Apple's privacy policies. Meta stated in February that Apple's App transparency feature would result in an annual $10 billion revenue increase. Reels has seen Zuckerberg invest in short videos, which generated $1 billion annually in annualized revenue. The product does not generate as much money as Instagram Stories or the main news feed. UBS' Lloyd Walmsley stated this in a note to investors. We believe investors should hear a clear and tangible improvement in the time it takes to feel comfortable, given the number of product changes that are underway. JMP analysts are positive about Reels' future. "We expect growth to rebound from its current levels while the company's cost structure is more disciplined." They wrote in a Thursday note. Meta has made progress with Reels, and AI has improved recommendations across content. Canaccord Genuity analysts said Wednesday that while concerns about a possible recession may continue to impact the company's digital advertising market, Reels improvements could help it recover.
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