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Digital advertisers pulling back is ‘a very bad signal’ for the macro economy: Analyst

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Brent Thill, equity research analyst at Jefferies, joins Yahoo Finance Live to discuss digital advertising in the wake of Meta's third-quarter earnings miss.

Video Transcript

SEANA SMITH: Let's get back to Meta because they missed on second quarter estimates, top and bottom. You're seeing their stock falling after hours, off just about 2%. So, coming back just a bit. A lot of that movement to the downside has to do with its 3Q guidance. We have Brent Thill, Jefferies equity research analyst, here to discuss. Brent, it was a mixed picture because you have the top and bottom lines a bit weaker than expected. Guidance, obviously, a huge issue. But Facebook daily active users was actually better than what the Street was expecting.

BRENT THILL: Yeah, look, overall ad slowdown for the entire industry. Everyone's going negative. Advertising is the canary in the coal mine. We're seeing the overall economy start to slow and advertisers shut spend off on these big platforms. We're seeing it across the board. Facebook, Twitter, Snap. Google was a little bit better, but I would consider Google more essential as it relates to kind of the nice to have on these other platforms. So we're seeing it universally.

And I don't think it's going to come to a head in terms of the negativity for another quarter or two. And so, look, the stock's cheap. The negativity is insane. There's really no catalyst for the ad names until the environment finds a bottom. And that is the broader macro environment. As long as the broader macro environment is tough, these names aren't going to work in the short-term. We're seeing even the weakness now filter into other areas of tech, including software with weaker prints. And we're seeing companies now revise numbers down.

So, overall environment is tough for everyone. It's a lot tougher for ad-driven names. And I think in the interim, dollars are going to continue to move up to Google on the big platform stories, companies that have great cash flow. And right now, it's impossible to forecast what Facebook is doing right now. The numbers have been terrible, and there, the guide's terrible as well.

RACHELLE AKUFFO: So, in terms of the growth drivers that you potentially see for Meta, where will its strengths be coming from?

BRENT THILL: Advertising, advertising, advertising. I think the Metaverse is a long ways out. So this is an ad-driven model. And the strength comes from Instagram. The strength comes from increasing monetization of Reels. The strength is going to come over time from these new categories. Unfortunately, these new categories are super early. So, as we've said, they're at a truck stop. They're putting new tires and a new underbelly on the car. They're probably getting a paint job, putting a new Blaupunkt stereo in. That that's a reference from the stereo I put into my car way back when.

But that-- like, they're totally overhauling this. And we don't know if it's going to come out looking like a clunker or if it's going to come out looking like a Porsche. And so, look, I think-- we've said this repeatedly. I've covered tech for over two decades. We've seen Microsoft, Adobe, great technology companies, go into pit stops. You don't know if they're going to come out. Microsoft came from 30 to 300. Adobe went from 30 to 700. They came out of the shop looking good. We just don't know what this is going to look like.

I do know that advertisers have said to us recently, they're coming back off of TikTok, and they're coming back to Instagram. There's been some hoopla about the redo on Instagram, and the CEO saying the product basically sucks and we're trying to experiment. It's not where we need it to be. But I do think we're hearing from advertisers the ROI is still one of the best on Facebook, on Instagram specifically.

But they're tinkering and they're making some changes. And there's obviously some changes, as well as the management team, with the CFO transitioning. So a lot of change. But I think patient long-term investors at this multiple will benefit. Short-term, I think tech is in a really tough spot for the next six months until we get clarity on what '23 numbers look like.

DAVE BRIGGS: Yeah, it's not just a question of what they look like when they come out of this, but when. That Metaverse is so far off. And to your point about TikTok, we're not going to get transparency there because they're a private-owned Chinese company. Have we got any understanding of if Facebook has figured out the Apple privacy changes?

BRENT THILL: I don't think anyone's figured it out. I think the walls have been shut. And it's not going to be like it was at any point in the past. But I can tell you that as a Instagram subscriber, you know, like, their targeting is as good as ever. Like, the data-- if you're logged in as you-- the data has been incredible. And I haven't seen any deterioration in their ability to target. If you're new or you're trying to bring someone new onto the platform or trying to figure out what they're interested in, yeah, maybe.

But I can tell you, with that username and login, if you're logged in, the targeting on this system is way better than any other system I've used. So I think it's never going to be what it was. Apple has made a choice to become more secure, and it's probably a good thing for consumers. It creates a headwind for Meta. They're working through this. Facebook, Twitter, the rest of the industry is obviously seeing a deterioration in their ability to target.

But again, I think any of us that have been on these platforms for a while, the more information you give, and if you say you're 80, you're going to get articles for bathtubs with doors that open at the floor. I don't want that. I want ads about travel and sports and things that are-- I'm interested in. So I think if we're telling the system accurately what we're interested in, I don't think the targeting needs anything better. There's nothing really anything better than what Meta is doing right now.

So I think it's a little overhated as it relates to their ability to target. I think the targeting is pretty good. I think the challenge right now is in the advertisers. As you mentioned, users are growing. Users continue to flock to these platforms. That's not the issue. We've got to get the advertisers to come back on. And right now, the advertisers aren't coming back on because they're worried about their own business. Advertising is the first thing they shut off. It's a very bad signal for the broader macro economy.

SEANA SMITH: Hey, Brett, and a couple of key executive appointments were also announced in this earnings release. Current CFO David Wehner, he's going to be taking on a new role as Meta's first chief strategy officer. And then we have Susan Li, who's Meta's current VP of finance, promoted now to chief financial officer. What do you make of these executive changes and this new role that Meta has created of chief strategy officer?

BRENT THILL: I mean, they've already rearranged, like, seven of the deck chairs. You might as well just rearrange them all. I mean, they've had so much change with Sheryl leaving. And you've seen so much change. So I think in some situations, like, again, when you go into the pitstop and you're redoing the car, you might as well just shake everything loose. And look, I think we'll hear more about these changes. I mean, I'm seeing this as first blush from you, so this is new to everyone.

We'll learn more about this, but I think there is a need for change. There's a need for some shakeup. Bring some new blood into these positions. And look, if you're going to hit the reset button, why not just hit the reset button hard? Instead of tinkering, why not just, again, tear out the interior, redo the paint, put the new Blaupunkt stereo in? Do it now. And so, hopefully, they can get all the change out, get it stabilized, and get the ship going in the right direction.

And again, I don't think Facebook is alone. This is not a Facebook or Meta issue. This is an issue for the industry. Twitter, Snap, the rest of the industry right now is going through the same situation. And we're seeing it again in software. This isn't just an ad-driven issue. It's a downturn in software demand. It's a downturn in ad-driven demand. We're in-- going into a tougher macro environment. And again, I think it's going to get a little worse before it gets better.

SEANA SMITH: All right, Brent Thill, always great to have you on. Thanks so much for jumping on here for earnings again. Meta off just about 1% after hours. Stock off about 50% since the start of the year.