Shares of Meta Platforms (NASDAQ: META) tanked close to 25% yesterday after the social media giant announced its Q3 results after the market closed on October 25. It reported adjusted earnings of $1.64 per share, significantly lower than estimates of $1.91 per share. The company’s revenue stood at $27.71 billion, marginally higher than estimates of $27.53 billion. 

However, sales were down 4% compared to the year-ago period due to falling average ad prices that declined by 18% year over year. Meta stock is now down 73% from all-time highs. It continues to wrestle with a slowdown in ad spending, Apple’s (NASDAQ: AAPL) privacy changes, and rising competition from TikTok. 

Further, shares of Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL), the parent company of Google, also fell almost 10% yesterday as it disappointed investors with Q3 results. Its revenue growth slowed to just 6% in Q3 compared to 41% in the year-ago period as online ad spending remains tepid. Ad revenue for YouTube fell 2% to $7.07 billion, compared to estimates of $7.42 billion. 

Tech giant Apple has cut production targets for its iPhone 14 line-up of smartphones, while Microsoft (NASDAQ: MSFT) also reported its slowest revenue growth in the last five years. It seems like big-tech stocks are likely to remain volatile in the near term.

Let’s see what impacted the performance of the two largest digital advertising companies in the world in Q3 of 2022.

 

Meta is investing heavily in the metaverse 

Meta forecast sales between $30 billion and $32.5 billion in Q4, compared to estimates of $32.2 billion. The company has now posted two consecutive quarters of revenue declines, and investors are expecting the trend to continue in Q4 as well.

While revenue was down 4% in Q3, Meta’s expenses surged 19% year over year to $22.1 billion, while operating income fell by 46% to $5.66 billion, indicating an operating margin of just 20% compared to 36% in the year-ago quarter.

Meta’s Reality Labs business which includes investments in the metaverse segment, fell by over 50% to $285 million. However, this business reported a loss of $3.67 billion, much higher than the $2.63 billion loss in the year-ago period. In the first three quarters of 2022, Reality Labs has burnt $9.4 billion.

In fact, Meta emphasized operating losses for Reality Labs will grow significantly year over year in 2023, making investors extremely nervous. The company explained, “We do anticipate that Reality Labs operating losses in 2023 will grow significantly year-over-year. Beyond 2023, we expect to pace Reality Labs investments such that we can achieve our goal of growing overall company operating income in the long run.”

 Meta stock is now down trading at levels last seen in 2016, underperforming the broader markets by a significant margin

 

Lower ad spending impacting Alphabet stock

According to Google’s chief business officer, Philipp Schindler, the digital advertising behemoth experienced a pullback in spending on digital ad verticals such as loans, mortgages, insurance, and cryptocurrencies.

In order to combat a challenging macro environment, Sundar Pichai claimed the company is “sharpening our focus on a clear set of product and business priorities,” while Ruth Porat, the finance chief, said, “we’re working to realign resources to fuel our highest growth priorities.”

Google Cloud remained the fastest-growing business for Alphabet, and this segment reported sales of $6.9 billion in Q3, compared to $5 billion in the year-ago quarter. However, losses for Google Cloud rose to almost $700 million from $644 million in Q3 of 2021.

Pichai explained Alphabet would look to drive its costs down to combat the current environment, which includes rising inflation, higher interest rates, and the possibility of a global recession.

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