My take on the future of Meta advertising revenue

Meta reported their Q3 2022 revenue, which was -4% vs. a year ago. The Q4 revenue guidance is between $30-32.5 billion. This contrasts with $33.6 billion in Q4 2021 (between -3% to -10% year-on-year reduction). The nine-month revenue in 2022 was $84.4 billion vs. $84.2 billion in 2021, virtually unchanged. So basically, Meta’s revenue growth is decelerating fast or even declining.

How about the near future?

Meta’s revenue is almost 100% from advertising. And we know that advertising is highly cyclical. In other words, companies tend to reduce their advertising spending when the economy is not doing well.

Given where advanced economies are in their business cycles, with high inflation and central bank tightening of monetary policies, it is likely that overall advertising spending will reduce or the growth rate will reduce in 2023 or even 2024.

Digital advertising worldwide spending is forecasted by eMarketer (in Oct 2022) to grow from $602B in 2022 to $681B (13% year-on-year) in 2023 and $756B (11% year-on-year) in 2024.

So unless Meta’s revenue grows at a similar rate, their share of the global advertising revenue will keep declining. And that is a very worrying trend for Meta’s shareholders. With Meta’s forward revenue guidance, it looks like their share of the global advertising spend will reduce meaningfully in 2022 and 2023.

Traditional growth drivers are facing intense competition

From a social media advertising POV, it is not a secret that Tiktok has been proliferating across North America, Western Europe, Latin America, Southeast Asia, etc…

The total number of users for Tik Tok in 2022 is estimated at 820 million, according to eMarketer. The user number is expected to exceed 1 billion soon. With this user base, Tik Tok advertising revenue is growing quickly, estimated at more than $11 billion in 2022 (eMarketer Apr 2022 forecast). Given the economic uncertainty globally, even if Tik Tok’s global revenue in 2022 ends at around $10 billion (as reported by the FT), they still represent a strong headwind for Facebook’s advertising business. For context, in the Q3 2022 earning call, Mark Zuckerberg mentioned, “We continue scaling monetization across both Instagram and Facebook, and the combined run rate across these apps is now $3 billion.”

As for revenue from e-commerce, Amazon’s advertising business is growing 30% year on year to become a $9.5 billion/quarter business or $40 billion/year. Amazon will continue to be a formidable competitor in e-commerce advertising to Meta in the US, Western European, and a few other regions. Amazon’s 30% year-on-year growth is awful for Meta, given their overall stalled trajectory.

Regarding Asia, Meta can’t count on China in the foreseeable future for mainland China’s e-commerce business. In Southeast Asia, there are many homegrown e-commerce players like Shopee (regional), Lazada (regional), Tokopedia (Indonesia), Tiki (Vietnam), etc… So I doubt that the prospect for Meta’s e-commerce advertising is bright here.

Given the above, I don’t think Advantage+ Shopping will be massive for Meta.

Where are the new growth drivers?

“Click-to-messaging” ads was mentioned heavily during the earning call as one of the primary growth driver.

“We started with Click-to-Messaging ads, which let businesses run ads on Facebook and Instagram that start a thread on Messenger, WhatsApp, or Instagram Direct so they can communicate with customers directly. This is one of our fastest-growing ads products, with a $9 billion annual run rate. This revenue is mostly on Click-to-Messenger today since we started there first, but Click-to-WhatsApp just passed a $1.5 billion run rate, growing more than 80% year-over-year.”

I think that this driver can be a potentially significant opportunity because:

  • While the open rate for email marketing is tiny, about 90%+ of people open their messages. So this means businesses can potentially have good ROI from this activity.
  • Whatsapp is particularly popular in markets outside of the US.
  • While spam messages are an area that needs attention, the situation can be improved with AI over time and regulation.
  • If Meta can somehow build a click-to-messaging offering or partner with other companies to offer a “light” CRM system for SMBs, that would be huge.

No other major growth drivers were mentioned on the Q3 2022 earning call from Meta. Interestingly, the $9 billion run rate for click-to-messaging is about the same as the estimated $10 billion loss to Meta from the Apple ATT update.

In conclusion, I agree with the analyst consensus that it is hard to see Meta returning 20-30%+ revenue growth year on year. In the near future, the base case is flat revenue growth year on year (if you take currency exchange fluctuation out). (By the way, this is my “gut” feeling, not using my complex model, haha). Overall, revenue growth might turn seriously negative for Meta because of the macroeconomic situation; however, in that scenario, Meta won’t be the only company impacted.

Cheers,

Chandler

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