CRTO - J.P. Morgan latest to slash estimates as online advertising weakens

J.P. Morgan has saved some of today's biggest estimate cuts for companies competing in online advertising as it anticipates a weaker operating environment in the second half of the year and into 2023.

That's part of a deep dive where the firm cut estimates and price targets on 26 companies in its Internet coverage universe, due to company-specific dynamics along with broader economic and foreign-exchange pressures.

"The overall macro environment has deteriorated since 1Q earnings with inflation reaching a 40-year high in May, fuel costs up 45% since early February, & Chase (credit card) data indicating slowing consumer spending & lower consumer confidence," the firm's Doug Anmuth and team wrote.

That's on top of J.P. Morgan models suggesting a 66% chance of economic recession over the next two years, and an 83% chance looking out three years.

Anmuth and company are especially concerned about online advertising, given that ad spending is highly correlated with gross domestic product. Major ad agencies at WPP , Interpublic Group ( IPG ) and Publicis Groupe ( OTCQX:PUBGY ) have all cut global ad estimates by 1-3% this year, with further downside risk in case of a recession, they noted.

"When comparing to the 2008-2009 financial crisis, the key difference is that digital accounted for 12% of total ad spending then vs. 67% in 2021, making online spend now far more exposed to broader macro trends," the firm said. Meanwhile, there are the continuing headwinds of online privacy changes made at Apple, as well as hot competition from TikTok (which could hit $6B in U.S. ad revenue this year, part of $11B-$12B globally).

Part of the tone was set by Snap ( NYSE: SNAP ) and its far-reaching macro warning about the second quarter , which spurred debate about how much of Snap's challenge was macro, vs. Apple and TikTok. "We continue to believe that macro pressures are the primary driver, with particular softness in brand spending, the retail vertical, & early-stage/VC-backed companies," the firm says in cutting revenue estimates by 4% for Q3, by 6% for Q4, and by 7% for 2023. It's reduced its end-of-2022 price target to $24, still implying 77% upside.

Turning to the big two in online advertising: Google ( NASDAQ: GOOG ) ( NASDAQ: GOOGL ) will hold up better as search ads are more "resilient" than social, but a slowdown is coming no less, with YouTube under some pressure as well. The firm is cutting estimates for second-half operating income by 4%, and lowering its GOOGL price target to $2,800, implying 26% upside.

And Meta Platforms ( NASDAQ: META ) should see its direct-response ads more resilient than brand advertising, but slower top-line growth may be in the offing alongside a hiring slowdown and pullback on future-bets investing, Anmuth wrote. He's cutting 2022 revenue estimates by 6%, and noted the firm's forecast $28B in Q2 revenue would mark the first quarter of declining revenue. It gets a price target cut to $225, suggesting 38% upside.

Smaller-scale companies Pinterest ( PINS ) and Twitter ( TWTR ) face a tough setup. For Pinterest, J.P. Morgan has cut revenue estimates for 2022 by 9%, and for 2023 by 13%, and cut its price target to $26, implying 34% upside. (The firm did see a positive for Pinterest in the hiring of Bill Ready as CEO .)

On Twitter ( TWTR ), the firm raised expectations for monetizable daily active users but "brand marketers likely pull back budgets first during periods of economic downturn, and ~85% of TWTR’s ad revenue is brand-based." It now sees Q2 revenues up 3% year-over-year vs. a forecast for 6%, and expects 2022 revenue will grow 8% (vs. previous expectations for 13%).

The firm cut its price target on Criteo ( CRTO ) to $29 (22% upside), and reduced its target on Cardlytics ( CDLX ) to $35 (56% upside).

J.P. Morgan's analysis is just the latest warning of a broad slowdown for digital advertising. RBC expected that small/mid-size business weakness would hurt ad-exposed names , and Credit Suisse looked to cut downside risk in a likely Internet ad recession .

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