Why Online Advertising Is Struggling, and What Lies Ahead for the Sector

Challenging Environment

The first quarter of 2022 brought forth a series of economic woes that spilled over into the online ad market. These included both rising interest rates and the war in Ukraine, all while inflation reached its highest rate in 40 years.

Meta Platform’s (META) Facebook is considered by some a canary in the coal mine. Most of its revenue is generated through advertising sales. CEO Mark Zuckerberg recently held an all-hands meeting where he announced the company was cutting back on its hiring of new engineers. He also reportedly called the current state of the economy “one of the worst downturns” in recent history.

Elsewhere in Social Media

Online advertising struggles aren’t limited to Facebook. In May, Snap (SNAP) issued downbeat guidance and said the macroeconomic environment had deteriorated faster than expected. Taken all together, the combined ad revenue for Meta, Google-parent Alphabet (GOOGL), Twitter (TWTR), Snap, Pinterest (PINS), and Amazon’s (AMZN) ad segment will grow 9% year-over-year in the second quarter, according to estimates from FactSet. That’s down from an annualized pace of 17% in Q1, and it represents the slowest rate of growth observed in Q2 since 2020.

Google is a notable outlier, however, due to its search engine dominance. Its online ad sales are expected to grow 12% year-over-year in the second quarter.

Second Half Predictions

Some Wall Street observers predict online advertising will fare better during the second half of the year, but others remain skeptical given the looming possibility of a recession. A recent report from JPMorgan (JPM) analyst Doug Anmuth pointed out that during the financial crisis of 2008-2009, digital advertising accounted for just 12% of all ad spending. In 2021, that number came in at 67%.

Plainly stated, online advertising is much more exposed to the broader economy than ever before. We haven’t yet seen the modern digital landscape and social media platforms be forced to deal with a protracted economic slowdown, so there are plenty of unknowns.

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