- Worsening economic outlook is hitting social media stocks, with Meta slumping
- Growth in ad revenue for pure-play digital platforms will fall this year
- For some analysts, the current depressed value of social media stocks offers a buy signal
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The massive plunge endured by many social media stocks this year shows that the sector may be in the midst of a perfect storm. For instance, Meta Platforms (NASDAQ:META) has lost around 50% YTD, while Snap (NYSE:SNAP) shed a whopping 69% during the same period.
The Global X Social Media ETF (NASDAQ:SOCL), which owns a basket of social media stocks from around the globe, is down about 35% this year.
A worsening inflation outlook, rising interest rates, and an imminent recession are prompting social media companies to cut back on their ad spending, making the earnings outlook for these tech giants increasingly uncertain.
However, some argue that the bearish spell is the perfect buy-the-dip opportunity for long-term investors, as many of the sector’s companies remain highly profitable.
GroupM, the ad-buying arm of WPP, in its mid-year update, expects growth in ad revenue for pure-play digital platforms will be about 12% this year, slower than the 32% pace observed in 2021.
The report says:
“Coming off the lows of 2020 and the highs of 2021, the advertising market is settling into 2022, a year that’s seeing rising inflation, increased wages, mounting regulatory pressure on Big Tech and an overall effort by consumers and marketers to find their footing in a world that’s getting increasingly used to living with COVID-19.”
Nonetheless, the report notes that many sectors are still seeing significant growth.
“Most marketers are still adding to their media budgets in 2022; a key difference between this year and last year is that the rate at which this is occurring for older marketers is simply slower, and at the same time, there are likely fewer new marketers emerging.”
TikTok Threat
Besides the uncertain macro environment and slowing ad spend, some company-specific headwinds are making investors nervous. Meta told investors in April that Facebook’s user growth had stalled. Meta’s first quarter sales rose just 7% from a year ago, marking the first time in its 10-year history that revenue grew in the single digits as a public company.
New rules from Apple (NASDAQ:AAPL) that require all social media companies to get smartphone users’ permission for tracking are hitting smaller players, such as Snap, pretty hard. These rules make it more difficult for advertisers to measure and manage their ad campaigns.
In addition to Apple privacy changes, the rise of Chinese-owned TikTok, with 2.91 billion monthly active users, poses a significant threat to both small and large social media giants. The service has attracted billions of teens globally and is taking away a bigger portion of the digital ad pie.
Buy Signal?
For some analysts, however, the current depressed values offer a signal to dive in and scoop up cheap stocks. And on top of that list is Meta, which runs the world’s largest family of social media apps, including Facebook and Instagram.
For investors who believe the problems at Facebook are temporary, that’s a buying opportunity. Meta is now trading at 12 times earnings versus a multiple of 20 for the NASDAQ 100 and 16 for the S&P 500. According to Bloomberg data, this is close to its cheapest level ever relative to earnings.
Meta still has the best gross profit margin among mega-cap peers. That’s perhaps why most analysts still rate the stock a buy on an Investing.com. Their 12-month consensus price target implies a 66.4% upside potential from the stock’s Monday close.
Source: Investing.com
Some analysts are also bullish about Google parent Alphabet (NASDAQ:GOOGL) which's stock is down about 18% this year after reporting disappointing earnings for the first quarter. They believe the tech giant’s broad business model makes its stock well-positioned to weather the economic downturn.
Morningstar analyst Ali Mogharabi said in a report in late April that YouTube’s ad revenue growth “was a bit disappointing” partly due to increased competition from newcomers like TikTok.
Bank of America, in a recent note, said:
“Alphabet has a more stable business, artificial intelligence (AI)/ machine learning (ML) advantages across the product stack (Performance Max a positive), significant expense flexibility, a [management] team doing more for shareholders under new CEO (ie buybacks) and potential valuation support.”
Bottom Line
Large-cap social media stocks, including Meta and Google, make a better contrarian bet than their smaller players. For bargain hunters who are looking for value in this bear market, sticking with these names is a better strategy, in our view.
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