Big Tech’s Ad Advantage Takes Spotlight in Q3

While the pressures of the global pandemic have not yet fully abated, the economic backdrop is steadily improving. And some sectors have been doing better than others. 

The following Big Tech companies are gearing up to report earnings next week, including Apple, Alphabet, Amazon, Microsoft and Facebook. They weathered the COVID-19 storm with ease, as consumers are using their products and services more than ever. This resulted in record profits for the group and sky-high valuations.  

The great advertising recovery this year has been one of the major ways Big Tech was able to climb higher. Advertising spend is often seen as a bellwether for the health of the overall economy, so as the economy outlook improved, companies poured money back into ads. 

While tech companies like Amazon, Alphabet, Apple and Microsoft have numerous revenue streams aside from advertising, it’s a different story for social media companies like Facebook, Twitter and Snap, where ad revenue makes up the bulk of overall sales.  

The revenue growth at the three mega-cap social companies was undeniable proof of the growth in digital ad spend. Snap reported revenue growth of a whopping 116% during the second quarter, while Twitter’s revenue rose 74% for its strongest growth since 2014.   

Meanwhile, Facebook reported revenue growth of 56% in Q2, which was its strongest since 2016. Facebook had ads to thank, which make up about 98% of all its revenue. The number of Facebook ads delivered rose 6% and the social giant saw a 47% increase in average price per ad during Q2.  

In the first half of 2021, U.S. ad spending grew by 32% year-over-year to reach $130 billion, according to advertising agency Magna. The agency predicts growth will continue to accelerate by double digits next year. 

Search and social advertising grew year-over-year in 2020 even during the worst of the pandemic and both platforms saw nearly 50% growth in the first half of this year. Search and social are expected to see consistent growth next year while other platforms see more modest growth.  

Even though Big Tech companies face serious regulatory pressure from lawmakers, the group has managed to maintain its market leadership through the ups and downs. But there’s an even bigger threat to ad revenue than Congress — Apple’s iOS 14.5 update. The update is finally beginning to wreak havoc on the mighty tech behemoths, and Snap was the first to report the negative impact. 

Privacy is an extremely sensitive issue, and consumers are more concerned about it than ever before. The recent Apple software update put more power and control into the hands of users by offering the option to opt out of app tracking, which was bad news for the countless apps that rely on valuable data tracking to deliver targeted ads to its users. 

As a result, Snap saw revenue decelerate dramatically, and investors were not happy, which sent the stock cratering more than 25% in the after-hours session Thursday. Revenue missed analyst expectations of $3 million, and the company attributed the decline in part to the Apple software update.

“We’re now operating at the scale necessary to navigate significant headwinds, including changes to the iOS platform that impact the way advertising is targeted, measured, and optimized,” CEO Evan Spiegel said in the earnings release.

Much like Snap, the other Big Tech giants were likely negatively impacted by Apple’s software update, no company has been more vocal than Facebook. Following Q2 earnings, Facebook CFO David Wehner warned that if there is impact to their ad business, it will be worse in Q3 than in Q2.  

Then just one month ago, Facebook’s VP of Product Marketing Graham Mudd detailed in a blog post that the impact from the Apple update was far greater than anticipated. Mudd estimated that Facebook underreported web conversions on Apple’s iOS by approximately 15% in Q3.  

“We believe that real world conversions, like sales and app installs, are higher than what is being reported for many advertisers. We are committed to helping you better measure these outcomes and improve your performance,” Mudd wrote. 

Big Tech has been resilient even in the face of major hurdles including growing competition and increased regulatory scrutiny. However, the push for further ad transparency is new and uncertain territory. Investors will paying very close attention to ad revenue growth next week as the mega tech giants report their Q3 financial results, and any fumble could weigh very heavily on their stocks.