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Why Twitter’s ad deserters could turn to Snap and Meta

Digital ad spending is in a bind as inflation bites into companies’ marketing budgets. Twitter has more problems than that, with big brands freezing their Twitter adverts in the aftermath of Musk’s takeover. Both Meta’s and Snap’s ad revenue could benefit from their competitors’ loss in the long-term.

- Snap reports slowest rate of growth in Q3 as companies trim marketing budgets

- Advertisers leaving Twitter could be Snap’s and Meta’s gain in the long-term

- The top two social media ETFs are both up in the past month

The Meta Platforms [META] and Snap [SNAP] share prices could stand to benefit from recent mayhem at Twitter headquarters since Elon Musk took the reins, taking the company private along with other sweeping changes. Investors will still be keeping a watchful eye on what Musk does and says next that could drive sentiment to other social media stocks.

Twitter has been a mess since Musk’s $44bn acquisition was completed almost one month ago. Thousands of employees have been fired or resigned, including many engineers responsible for coding, and there have been rumours that the platform is at higher risk of breaking down without their oversight. It’s no surprise that Musk decided to delist Twitter from the New York Stock Exchange.

While the Meta share price has fallen 13.6% in the past month, it has climbed back 14.6% since Musk closed on Twitter on 27 October. Snap has not been as impacted by the acquisition, though its share price has risen 32.9% over the past month and 7.9% since the sale.

Meta’s layoffs and Snap’s digital ad slump

Driving the Meta share price lower has been CEO Mark Zuckerberg’s determination to push on with his vision to build the metaverse. The company’s Reality Labs unit lost $3.7bn in the third quarter (Q3) 2022, wider than the $2.8bn net loss in Q2. Up to 11,000 staff have been laid off this month as tech giant looks to cut expenses while doubling down on its metaverse investments.

Brad Gerstner, the founder of investment firm Altimeter Capital, wrote an open letter to Zuckerberg in which he acknowledged the metaverse’s potential, but called for a $5bn annual cap on investments. As of 25 October, Altimeter had a 0.1% stake in Meta, comprised of 2.5m shares.

Snap’s share price has been on the up despite its Q3 2022 earnings indicating a slowdown in digital ad spending. It reported sales of $1.13bn, up 6% year-over-year, its slowest rate of growth as a public company.

As well as the challenging macro environment, there’s also the fact that “[a]dvertisers still don’t understand the platform and consider it experimental,” Jasmine Enberg, a principal analyst at Insider Intelligence, told the New York Times following Snap’s Q3 earnings.

Twitter’s lost ad dollars

General Mills [GIS], General Motors [GM] and Mondelez [MDLZ] are just a few of the big-name brands to have paused their ad spend on Twitter in the past few weeks. Most of these advertisers are waiting for Musk’s plan for Twitter – regarding content moderation, in particular – to become clearer.

In the meantime, Twitter’s lost ad dollars could be Snap and Meta’s gain. In a note to clients seen by Barron’s, MKM Partners' Rohit Kulkarni suggested Meta as the most likely beneficiary of Twitter’s losses over the next six months.

Snap stands to benefit, too. According to web analytics firm SimilarWeb, traffic to the subdomain ‘ads.twitter.com’ fell 19% year-over-year in October, while traffic to ‘ads.snapchat.com’ jumped 47% from October last year.

Musk has indicated his intention to step back and appoint someone to run Twitter in his stead. The right candidate could calm the nerves of investors. In a tweet this month, Wedbush analyst Dan Ives also suggested that “Musk refocuses back on the golden child Tesla”.

Funds in focus: Global X Social Media ETF

Though 2022 has been difficult for tech and social media stocks, recent gains suggest that investors have reason to be optimistic. Most ETFs holding these stocks are down year-to-date, but have gained over the past month.

Meta is the second-biggest holding in the Global X Social Media ETF [SOCL], with a weighting of 9.09% as of 22 November. Snap is the fourth-biggest and has been allocated 6.29% of the portfolio. The fund is down 46% year-to-date, but up 12.1% in the past month.

As of 22 November, the two companies both appear in the top 10 holdings of the VanEck Social Sentiment ETF [BUZZ]. Meta is seventh with a weighting of 3.03% and Snap 11th with a weighting of 2.81%. The fund is down 42.2% year-to-date, but up 4.3% in the past month.

As of 24 November, Meta is also the tenth largest holding in the Invesco QQQ Trust ETF [QQQ], with a weighting of 2.12%. The fund is down 27% year-to-date, but has gained 4.9% in the past month.

 

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