Internet companies could see pressure from lower brand-ad spending and slow improvement in ad pricing, with any contribution from generative AI likely small in the near term. Among the large incumbents, Alphabet search may be the most resilient, while Meta and Snap might feel pressure from persistent ad-pricing headwinds. Online marketplaces like Uber, DoorDash and Airbnb are at risk of negative top-line revisions amid a slowing economy, with higher interest rates and regulations dragging multiples.
Digital ads, marketplaces have limited margin levers in 2024
Moderating inflation has aided margins for consumer internet companies, yet growing recessionary risks and a lapping of cost cuts in 2024 may limit further margin expansion. Online travel and delivery marketplaces’ sales consensus may be optimistic, while digital companies could see negative revisions to 2H24 estimates if brand-ad spending remains weak.
Pressure remains on the top line
Revenue growth could stay challenged for consumer internet companies given their higher sensitivity to economic expansion. Most digital-ad companies have slowed hiring to rationalize costs, which might aid EPS and free-cash projections through 1H24. Among marketplaces, Airbnb and Booking’s sales expectations face tougher comparisons and a likely pullback in consumer spending. Still, they could have less profitability pressure than companies such as Lyft and Instacart, which have revenue hurdles amid muted volume growth.
Marketplaces could see negative sales revisions
A pullback in consumer spending could also pressure consensus for online-travel and delivery marketplaces, which to date have seen positive sales revisions. Market position and pricing for larger companies including Uber, Airbnb, Booking.com and DoorDash have likely been aided by their growing scale and supply advantages, though a recession could result in muted volume growth through 2024, making revenue and EPS consensus appear optimistic.
Digital-ad companies could see an inflection next year, especially for direct-response ad spending, while outlay on brand ads remains challenged as advertisers prioritize a higher return on investment in a downturn.
Cost cuts to offset margin headwinds
Social-media companies may be able to avoid negative Ebitda revisions amid fixed-cost cuts and the potential for ad targeting on their platforms to improve, we believe, driven by increased first-party data and the use of large-language models. Cost reduction and hiring freezes have helped offset some margin headwinds for large tech companies including Meta and Alphabet, though top-line pressure may not abate through next year due to the higher risks of a recession. Moderating inflation along with improved driver supply for online delivery and ridesharing marketplaces could also help profitability offset muted sales growth.
Consensus is for Uber and DoorDash margins to improve through 2024, driven by organic volume gains and geographic expansion, which may not materialize if there’s a recession.
Bloomberg
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