Investors Analyze Potential Risks for Meta and Google Despite Recent Earnings

Shares of Meta Platforms Inc., Snap Inc., and Alphabet Inc. do not reflect the recovery of the digital ad market, despite its recent improvement.

All three reported generally positive results this week, with ad spending up from a year ago. This should have been a welcome sign for investors who have seen the industry struggle for more than two years in turmoil. Companies have had to deal with a post-pandemic drop in online marketing spending, an ever-changing list of financial uncertainties and a change in Apple Inc.’s privacy policies that made smartphone ads less effective.

But warnings from company executives about broader economic conditions and the search for new growth paths sent shares lower following the results. Take Meta, the owner of Facebook, Instagram and WhatsApp. Shares initially rose more than 5% after Wednesday’s quarterly report and guidance. Then CFO Susan Li told analysts on a call that the future looks unpredictable. “We are very exposed to volatility in the macro world,” Li said. “Profit prospects are uncertain” for 2024.

Meta shares gave up all their gains and fell as much as 6.7% Thursday morning in New York, the biggest intraday drop since December. Snap fell 1.9% and Alphabet fell 2.9% after Wednesday’s 9.5% drop.

Financially, all three look stronger. Meta exceeded revenue estimates and showed that growth will continue for the rest of the year. Snap returned to sales growth after two periods of decline. Alphabet beat forecasts for both search ad sales and total revenue, even as its cloud business struggled.

The transition has not been easy. Companies have been cutting costs deeply, reshaping their ad business and limiting new spending to what they see as more stable bets, such as artificial intelligence and augmented reality.

Snap, maker of the Snapchat app, has spent much of the year revamping its advertising business, which finally returned to growth in the last quarter. But when it reported results on Tuesday, the company said it had limited visibility into earnings for the rest of the year.

The war between Israel and Hamas was cited as one source of uncertainty. A “large number” of ad campaigns were paused in the third quarter after the conflict began, Snap said, and that delay could continue in the fourth quarter. As a result, the company said it would be “misleading” to provide an official outlook for the current quarter.

Snap fell 5.4 percent on Wednesday. “Given the near-term issues that may take some time to resolve, we remain on the sidelines,” said Susquehanna Financial Group analyst Shyam Patil, who has a neutral rating on the stock.

Angelo Zino, an analyst at CFRA Research, shares these concerns. “I would say we’re now in an environment where investors are increasingly concerned about macro/geopolitical/regulatory uncertainties,” he said.

For Alphabet, where the advertising business is already tied to the mature and dominant search business, investors are looking for other sources of growth. On Tuesday, the cloud computing unit’s disappointments overshadowed the strengthened advertising business. Although total sales were about $1 billion higher than analysts had estimated, shares fell 9.5% on Wednesday, the biggest one-day drop since 2020.

The direction of digital ad sellers is closely watched because their income depends on whether companies are confident enough to spend money on marketing. Inflation, the wars in Ukraine and Gaza, and rising interest rates have been a headwind.

“They are strongly tied to the health of the economy,” Zino said.

Amazon.com Inc., which is expanding its own advertising business, should give investors a clearer picture of how holiday demand is shaping up when it releases results on Thursday.

Meta, Snap and Alphabet use all revenue from digital ads to fund investments in new technology. A market pullback could make it harder to spend big money on AI innovations and other big bets. While investors have rewarded stocks that show strength in AI, there is less support when a company’s main revenue stream is at risk.

Metalla Li admitted that stable profits are vital if it is to maintain its targets. “We understand that we have to earn the opportunity to invest in all of these things by growing the group’s operating income over time,” he said.