Social Media's Ad Revenue Slowdown Hits ETFs

Digital ad-dependent stocks have reported a sharp slowdown in revenues.

The digital ad market is reeling: Everyone from Snap Inc. to Meta Platforms, Inc. to Twitter to Roku has warned of tough times for the advertising market.

Last week, Meta, parent company of Facebook and Instagram, reported its first year-over-year decline in revenues as a public company.

Snap—a social media company known for its disappearing messages—and Roku, creator of a popular operating system for streaming TVs—saw their revenue growth decelerate from close to 30% to zero in a matter of months.

Even Twitter left enough space in its earnings report to blame “advertising industry headwinds” for its Q2 earnings shortfall. 

While each of the companies is trying to diversify its revenue streams, ads currently account for more than 99% of sales for Meta, Snap and Twitter. Roku generates 88% of its sales from its platform segment, which generates revenues from ads and other marketing-related products.

The woes of these companies are having a disproportionate impact on one sector in particular: communications services. Meta alone has a 17% weighting in the Communication Services Select Sector SDPR Fund (XLC). 

On a year-to-date basis, XLC is the worst-performing sector ETF within SPDR’s sector suite, with a loss of 27% versus 12.5% for the SPDR S&P 500 ETF Trust (SPY).

Ad Market Grinding to a Halt 

Almost every company that generates revenues from advertisements has warned of the same thing: Marketers are shrinking their ad spending. Nobody appears to be immune to this ongoing revenue loss. 

Meta CEO Mark Zuckerberg said that the economy was experiencing a downturn that would have “a broad impact on the digital advertising business” and that the situation had gotten worse over the past quarter. 

Roku, which profits from the ads people see as they watch streaming apps like Hulu and HBO Max, said that it “saw a significant slowdown in TV advertising spend due to the macroeconomic environment.” 

Most of these companies reported sharply slowing revenue growth—if not outright revenue declines— even as they continued to grow their user bases. That means that while ad impressions are up, ad prices are down significantly. 

In addition to blaming economic concerns, the ad companies said that privacy changes that Apple made to the iPhone late last year made ads less effective. This phenomenon had a particularly negative impact on Meta, Snap and Alphabet’s YouTube, which rely on tracking users across apps to measure the efficacy of the ads shown on their platforms. 

Another shared challenge cited by the companies was growing competition from TikTok, the rapidly growing short form video platform that continues to appeal to GenZ and millennial users.

In the short term, TikTok is pulling eyeballs and ad spend away from older social media companies; in the long term, it represents an existential threat to any social media app that doesn’t stay fresh and relevant enough to keep users engaged. 

TikTok is a subsidiary of ByteDance, a private Chinese company.

Exposed ETFs 

The plethora of headwinds is likely to keep the Communication Services Select Sector SPDR Fund (XLC), or any ETF that holds large positions in ad-related companies, depressed in the short term. Investors with a longer-term view might see the pullback as an opportunity, especially if they believe the ad headwinds will eventually abate and the companies that dominate these ETFs like Meta can effectively thwart the TikTok threat.

In addition to XLC, funds like the Global X Social Media ETF (SOCL), the Roundhill Ball Metaverse ETF (METV) and the Invesco Dynamic Media ETF (PBS) have heavy allocations to Meta and some of the other ad-based businesses. 

SOCL provides broad-based exposure to social media stocks, including Chinese companies like Tencent and Baidu, but of course, it doesn’t include TikTok owner ByteDance, which is a private company.

METV also has decent exposure to social media stocks, including a 6% weighting in META and a 3% weighting in Snap, but its companies have more diversified revenue streams. Top holdings include Roblox, Nvidia, Apple and Microsoft. 

Finally, PBS tracks an index of U.S. media stocks, including traditional media and social media names. In addition to Twitter and Meta, top holdings include Netflix Inc., Walt Disney Co. and Scholastic Corp. 

On a year-to-date basis, SOCL is lower by 39.2%, METV is down by 40.8% and PBS has lost 26.5%. 

Pinterest Inc. reported a 9% revenue increase in the second quarter on Monday after market close compared with a year ago, while still citing "the uncertainty facing our advertisers." PINS has a 5% weighting in SOCL. The company guided to mid-single-digit growth in revenues for the third quarter, which was enough to exceed investors' depressed expectations. The stock jumped 20% in after-hours trading. 

Follow Sumit Roy on Twitter @sumitroy2