7/26/2022: Are We Seeing a Business Spending Slowdown?

Advertising and cloud revenue is lower than expected from $GOOG, $SNAP and $MSFT Q2 2022 earnings,

Alphabet and Microsoft just announced their earnings for Q2 2022 this afternoon. Alphabet slightly beat on ad revenue but missed on overall revenue and EPS. Microsoft missed both revenue and EPS. This is somewhat expected. After the disastrous SNAP 0.00 earnings last week, people are prepared for the worst. Google ad revenue turned out to be alright. But cloud revenue for both Google and Microsoft was lower than expected. Chances are businesses becoming more conservative on their IT spending. In an uncertain environment, that’s one of the easiest areas to find savings or scale back on spending. This might be indicative of a trend for many SaaS companies. After years of increased spending on cloud and SaaS services, companies might choose not to upgrade or even cut underutilized services under this uncertain environment. This downtown would be informative on which services hold the staying power and could succeed in the long run.

Back to ad spending, Google search ads is less impacted by the infamous Apple privacy change since the ads are mostly targeted by the search queries. Search ads grew a healthy clip of 13.5% (from $35.9B to $40.7B) although it’s quite a deceleration from the 24.3% growth in Q1, indicating a potential slowdown of marketing spending from businesses. YouTube revenue only grew 4.8%, a dramatic slowdown from the growth of 14.4% in Q1 2022, which probably could be partially attributed to the Apple Privacy change introduced at the end of Q2 2021. The Apple privacy change makes micro-targeting on users less effective. Unlike search ads, social media platforms like Snap, Facebook and Youtube rely primarily on these micro-targeted ads for their revenue. In other words, it used to be that when an ad was shown, out of one million ad views, there might be on-average 5 conversions like app downloads, account signups or online purchases happening. After the Apple privacy change was implemented, that number went from 5 to 2 (not actual numbers just an example). It’s either that the advertiser has to pay more per conversion or the advertising platform has to reduce the ad price per ad view to make this work. It would eventually land on an equilibrium where advertisers pay a bit more per conversion and advertising platforms earn a bit less per ad view. From this YouTube number and the SNAP numbers (users grew 18% but revenue only grew 13%), I truly worry about Facebook’s numbers tomorrow. On the other hand, the expectation for Facebook’s earnings is already set so low. Not-so-horrible would be considered good.