It seemed like social media giants Snap, Facebook and Twitter were invincible as digital advertising took off this year. But if we learned anything from the third-quarter earnings season so far, it’s that the party can’t last forever.
It wasn’t all bad news, and every company is dealing with its own set of challenges. Still, one thing was abundantly clear — the monster revenue growth at Facebook, Snap and Twitter over the past year or so took a worrisome downturn.
Third-quarter revenue rose year-over-year for all three major social media companies, but the growth rates were nowhere near levels seen in Q2. Snap reported revenue growth of a whopping 116% in the second quarter, but revenue grew only 57%, to $1.07 billion in Q3. The company had previously forecast that it expected Q3 revenue growth between 58% to 60%. Investors were disappointed, and the stock tanked more than 20% in the after-hours session following the results.
Twitter’s revenue rose 37% to $1.28 billion in Q3 compared with 74% year-over-year growth in Q2, and Facebook said revenue jumped just 35% last quarter versus 56% growth in Q2.
That’s not to say fewer consumers are using the social platforms. Daily Active Users (DAUs), a key industry metric, continued to rise in the third quarter for the three major social companies.
But as predicted last quarter, Apple’s iOS 14.5 update impacted social’s Q3 revenue far more than it did in Q2. Even though Facebook was the most vocal about the impending effect on social’s ad business, Snap felt the most pain.
“Our advertising business was disrupted by changes to iOS ad tracking that were broadly rolled out by Apple in June and July,” Snap CEO Evan Spiegel said on the company’s Q3 earnings conference call on Oct. 21. “While we anticipated some degree of business disruption, the new Apple-provided measurement solution did not scale as we had expected, making it more difficult for our advertising partners to measure and manage their ad campaigns for iOS.”
Apple’s software update aims to provide more transparency to users as privacy concerns are at all-time highs. However, the increased transparency doesn’t bode well for tech companies that rely on targeted advertising to reach consumers.
Facebook warned that the impact from Apple’s update will continue to cause uncertainty and will be a headwind in Q4 for the company. The social company has a plethora of other major concerns on its plate, and thus its financials have been playing an even more important role in convincing investors of its value.
Meanwhile, Twitter saw the least impact from the iOS update, as its advertising is primarily driven by brand ads. CFO Ned Segal noted on the Q3 earnings conference call on Oct. 26 that it was too early to assess the long-term impact of the Apple update, but the impact on its Q3 revenue was lower than expected. He also said Twitter would likely see a modest impact in Q4.
Though challenges caused by the Apple software update were largely expected in Q3, the sharp decline in revenue growth still came as a shock to investors. There is still so much uncertainty, and that is putting an immense amount of pressure on the tech companies to rush to figure out a way to navigate the roadblock.
On the bright side, this software update could actually be a blessing in disguise for social media companies in the long term. It has strengthened the argument that they need to diversify their businesses and revenue streams in order to continue to thrive in a quickly evolving tech landscape. Take Facebook, or Meta, for example. The company changed its name Thursday and is attempting to grow its business beyond just social media.
Nevertheless, in the near term, there will need to be substantial proof that Snap, Facebook and Twitter are managing the software update much better than they have, and all eyes will be on meeting and exceeding Q4 revenue targets.