JP Morgan latest to cut estimates as online advertising weakens (NASDAQ:META)

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JP Morgan spared some of today’s largest estimate cuts for competing companies in online advertising as it anticipates a weaker operating environment in the second half and into 2023.

it’s part from a deep dive where the company cut price estimates and targets for 26 companies in its internet coverage universe, due to company-specific dynamics as well as broader economic and currency pressures.

“The overall macro environment has deteriorated since first quarter earnings, with inflation hitting a 40-year high in May, fuel costs up 45% since early February and data from Chase (credit card ) indicating a slowdown in consumer spending and a drop in consumer confidence,” the company’s Doug said. Anmuth and his team wrote.

This is on top of JP Morgan’s models suggesting a 66% chance of economic recession over the next two years and an 83% chance three years from now.

Anmuth and company are particularly concerned about online advertising, given that ad spending is highly correlated to gross domestic product. Leading ad agencies WPP, Interpublic Group (IPG) and Publicis Groupe (OTCQX:PUBGY) have all cut their global ad estimates by 1-3% this year, with further downside risk in the event of a recession, they said. note.

“Compared to the financial crisis of 2008-2009, the main difference is that digital then represented 12% of total advertising expenditure compared to 67% in 2021, which makes online expenditure now much more exposed to broader macroeconomic trends” , the company said. Meanwhile, there are the continued headwinds of online privacy changes made by Apple, as well as stiff competition from TikTok (which could hit $6 billion in U.S. ad revenue this year, part of 11 to 12 billion dollars worldwide).

Part of the tone was given by Snap (NYSE: SNAP) and its far-reaching macro warning about the second quarter, which sparked debate about how much of Snap’s challenge was macro, versus Apple and TikTok. “We continue to believe that macroeconomic pressures are the main driver, with particular weakness in spending by brands, the retail sector and early-stage/venture capital-backed companies,” the company said. by cutting its revenue estimates by 4% for the third quarter, by 6%. % for the fourth quarter and 7% for 2023. He reduced his end-2022 price target to $24, which still implies a 77% upside.

Let’s move on to the two big names in online advertising: Google (NASDAQ:GOOG) (NASDAQ: GOOGL) will hold up better, as search ads are more “resilient” than social media, but a downturn is still to come, with YouTube also under pressure. The company is slashing second-half operating profit estimates by 4% and lowering its GOOGL price target to $2,800, implying a 26% hike.

And the meta-platforms (NASDAQ: META) is expected to see its direct-response ads more resilient than branded advertising, but slower revenue growth could be in sight alongside slower hiring and lower investment in future bets, a writes Anmuth. It cut 2022 revenue estimates by 6% and noted that the company’s forecast of $28 billion in second-quarter revenue would mark the first quarter of revenue declines. He gets a price target reduced to $225, suggesting a 38% upside.

Small businesses Pinterest (PINS) and Twitter (TWTR) face a tough setup. For Pinterest, JP Morgan cut its revenue estimates for 2022 by 9% and for 2023 by 13%, and lowered its price target to $26, implying a 34% upside. (The company saw a benefit for Pinterest in hiring Bill Ready as CEO.)

On Twitter (TWTR), the company raised expectations for monetizable daily active users, but “brand marketers should cut budgets first during economic downturns, and around 85% of ad revenue from TWTR are based on the brand”. It now sees second-quarter revenue growing 3% year-over-year versus a forecast of 6%, and expects 2022 revenue to grow 8% (vs. previous expectation of 13% ).

The company cut its price target on Criteo (CRTO) to $29 (22% upside) and cut its target on Cardlytics (CDLX) to $35 (56% upside).

JP Morgan’s analysis is just the latest warning of a broad digital advertising slowdown. RBC expected weakness in small and medium-sized companies to hurt names exposed to advertising, and Credit Suisse sought to reduce downside risk in a likely internet advertising slump.

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