Is the advertising market in trouble?

And if so, does that mean startups are going to see cheaper growth?

Snap, the parent company of the popular Snapchat social media service, reported earnings last week that investors rejected. In the wake of its second-quarter financial reporting, shares of Snap cratered from $16.81 Thursday afternoon, before its earnings report, to around $10 per share as of this morning.

Snap was not the only victim of its lackluster earnings digest — other companies that make money off of advertising incomes saw their share prices dip on concerns that the social network was not an outlier. Alphabet, Meta and Pinterest also took blows, cutting their worth ahead of earnings disclosures as investors lowered their hopes for ad-based incomes.

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Given the sheer number of Big Tech companies that are betting on the advertising market, the news matters. Mix in the fact that startups are also pursuing ads as a monetization lever and concerns about the health of advertising spending matter to tech companies big and small.

Let’s peek at what Snap showed us and consider what to expect from the coming week’s Big Tech earnings; we’re about to hear from all the largest U.S. tech companies, all of which have an advertising business of one sort or another. Are we seeing the ad market truly tumble? And if so, what should we expect to shake out from the decline?

Snap’s woes

With revenues up 13% year on year to $1.11 billion in the second quarter and positive adjusted EBITDA of $7 million, you might be surprised that Snap was so heavily punished by investors after its earnings report. After all, CNBC noted that its profitability only missed expectations by a penny per share, and its revenue was just $30 million under expectation.

So why the enormous repricing of the value of Snap? A few reasons: It missed expected daily active user growth by a few million, saw its GAAP net loss nearly triple, and saw its operating and free cash flow results worsen, landing deeper in the nine-figure red territory.

Furthermore, the company said that its revenues in Q3 so far are flat from year-ago results and declined to provide Q3 guidance, noting that “forward-looking visibility remains incredibly challenging, and it is unclear how the headwinds we observed in Q2 will evolve as we move through Q3.” (Recall that Snap managed positive free cash flow and net income in Q4 2021.)

All of that was most unwelcome.

But are ad-based businesses heading for trouble? More to the point, if that is true — as investors clearly fear given sympathetic selloffs in companies likely to be affected by similar changing market dynamics — whom does it impact? A host of companies, including the largest firms out there. Recall:

  • Apple Search Ads alone are expected to grow to $4.1 billion in revenue by 2025, per analysts.
  • Amazon’s ad business grew to $31 billion last year, per Insider, a figure that could rise this year.
  • Microsoft recently won Netflix’s business to help build out its ad-supported consumer tier and has ads in products from search to operating systems.
  • Meta is an ad-powered business, driving $27.0 billion of its $27.9 billion worth of revenue in Q1 2022.
  • Alphabet is not only a search-ad-driven business — ads power each of its top three products (search, network, YouTube).

So the majors are impacted by advertising strengths and weaknesses. Given that their advertising products are different from Snap’s to varying degrees, we cannot forecast their results in the wake of Snap’s slack Q2 report. But Snap’s Q2 digest is cause for concern all the same.

What about startups? Some startups do use advertising incomes as a way to grow. Instacart, to pick an example, has a growing advertising business. Swiftly, which also operates in the grocery sector, leverages advertisements, too. But while there is some concern out there for startups with exposure to the rising and falling fortunes of the advertising market from a revenue perspective, there’s also a silver lining.

Perhaps even a gold lining. Weakness in the advertising market, driven, say, by more conservative consumer spending levels, could lead to less demand for ad inventory. This, as you would expect, would be bad news for the platforms hellbent on hoovering up as much ad spending as possible. But for startups, could the changing market be a boon instead of a curse?

Yes. If falling advertising demand leads to lower prices, any startup today that is using paid channels for growth may find that they can extract more bang for their buck. More clicks for their duckets, if you will. More engagement for their doubloons, perhaps. More zing for their nickels. You get the idea.

Recall that CAC, or customer acquisition cost, is a key variable in startup accounting at both B2B and B2C companies. What if that line item fell in cost by 10% or 20%? What impact would that have on startups that are focused on the nearly impossible task of keeping growth up while slimming burn?

A big one. Lower CAC would mean more efficient spending from those firms, something that investors love. And it would free up more capital to attract more customers, meaning faster growth. It could form a double-win for startups, especially those looking for new users and customers in the most competitive market.

To avoid getting ahead of ourselves, let’s not pretend that we know what is going to happen this week. We’ll learn as the majors report their results and discuss outlooks. But as advertising is increasingly something that a handful of media companies and mega-cap tech benefits from, the startup impact of this particular market wobble could wind up more positive than not.