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#SocialStocks: Reddit falls short of ad revenue target ahead of potential IPO

Posted December 28, 2023 at 10:00 am
Andrew Perez
The Fly

X faces lawsuit for millions in unpaid bonuses, Meta’s encryption rollout under a microscope and other notable stories from this week

Welcome to “#SocialStocks,” The Fly’s weekly recap of Wall Street’s reactions to social media stock news.

PRE-IPO:

If the market for initial public offerings recovers in the new year, one company that aims to go public early on is Reddit. An IPO will put the spotlight on the prospects for Reddit’s advertising business, which has fallen short of ambitious growth targets outlined by executives two years ago, The Information’s Cory Weinberg and Sahil Patel reported. Reddit expects to finish this year with ad revenue up more than 20% to slightly over $800M, two people familiar with the matter said. While that’s a faster growth rate than firms like Snap (SNAP) and Pinterest (PINS) reported, Reddit had said two years ago it aimed to exceed $1B in ad revenue by 2023, up from around $350M in 2021. Ad executives say one reason Reddit fell short was the weakness in the ad market starting early last year, when rising interest rates caused marketers to pull back, the author added.

BONUS LAWSUIT: 

On Friday, a federal judge gave the go-ahead on a lawsuit against X, formerly Twitter (TWTR), in which workers claim the company never paid millions in bonuses, Johnny Diaz of The New York Times reported. Former senior director of compensation Mark Schobinger sued the company in June, arguing the company claimed employees would receive 50% of their 2022 targeted bonuses if they stayed with the company in the first quarter of 2023. However, the bonuses were never paid, according to the suit. Schobinger filed the suit on his own behalf and of the behalf of nearly 2,000 other workers, both current and former. The amount of the dispute is greater than $5M.

DEATH AND TAXES: 

An Italian tax claim against Meta Platforms (META) has been escalated to the EU Commission’s VAT committee for evaluation, Reuters’ Emilio Parodi noted. According to three sources, Meta faces a potential tax bill of around $954M in Italy after prosecutors launched a a tax audit investigation.

CONTROVERSIAL ENCRYPTION SET TO ROLL OUT: 

Meta will begin rolling out encryption for Facebook direct messages this month, a move that members of its safety staff have long warned would end in disaster, Jeff Horwitz and Katherine Blunt of The Wall Street Journal wrote. The encryption feature was first announced in 2019 as a way to enhance users’ privacy, but employees have warned such encryption would limit the ability to detect and report child sexual abuse on Meta’s platforms. While other companies, such as Apple (AAPL), have implemented such encryption on their platforms, those services don’t often connect users with strangers.

SHARE SALE: 

In a regulatory filing, Meta Platforms disclosed that its chief product officer Christopher Cox sold 10K shares of common stock on December 19 in a total transaction size of $3.5M. Additionally, in two separate transactions, Cathie Wood’s ARK Investment bought 16.3K shares of Meta Platforms and 158K shares of Zoom Video (ZM) last week

FTC PROPOSES COPPA RULE CHANGE: 

The Federal Trade Commission has proposed changes to the Children’s Online Privacy Protection Rule or COPPA Rule, that would place new restrictions on the use and disclosure of children’s personal information and further limit the ability of companies to condition access to services on monetizing children’s data. The proposal aims to shift the burden from parents to providers to ensure that digital services are safe and secure for children. In a notice of proposed rulemaking, the FTC is seeking comment on proposed changes to the COPPA Rule aimed at addressing the evolving ways personal information is being collected, used, and disclosed, including to monetize children’s data, and clarifying and streamlining the rule. The COPPA Rule, which first went into effect in 2000, requires certain websites and other online services that collect personal information from children under the age of 13 to provide notice to parents and obtain verifiable parental consent before collecting, using, or disclosing personal information from these children. The rule also limits the personal data that websites and other online services can collect from children, limits how long they can retain such data, and requires them to secure the data. “Kids must be able to play and learn online without being endlessly tracked by companies looking to hoard and monetize their personal data,” said FTC Chair Lina Khan. “The proposed changes to COPPA are much-needed, especially in an era where online tools are essential for navigating daily life-and where firms are deploying increasingly sophisticated digital tools to surveil children. By requiring firms to better safeguard kids’ data, our proposal places affirmative obligations on service providers and prohibits them from outsourcing their responsibilities to parents.”

ANALYST COMMENTARY: 

In its 2024 internet outlook, Wedbush highlighted five key themes across its coverage. First, the firm sees a return to trend for digital ads and e-commerce as it expects more normalized growth rates for e-commerce and digital advertising in 2024 with both industries positioned to accelerate next year. Second, Wedbush sees retail media remaining one of the fastest growing segments of digital advertising with growth of about 22% in 2024. The firm raised the its price target on Pinterest to reflect the latest views heading into 2024, while keeping a Neutral rating on the shares. Pinterest has outlined a path to deeper monetization, and Wedbush is encouraged by the product roadmap that management has undertaken with new tools to improve attribution and targeting on the platform. Additionally, Pinterest’s partnership with Amazon (AMZN) will bring advertiser density to the platform and should contribute to ARPU growth in the coming quarters. Despite near-term monetization tailwinds, rising ad load may lead to disruptions in user engagement, which could limit ARPU upside over time, Wedbush argues. Also, Wedbush raised the firm’s price target on Meta to reflect the latest views heading into 2024, while keeping an Outperform rating on the shares. Within the firm’s coverage rankings, Wedbush is lowering Google (GOOGL) to number 2 within digital advertising and raising Meta to number 1. 2024 presents a relatively more challenging year for Google, in the firm’s view, given the recent deceleration of Google Cloud, uncertainty related to its AI initiatives, and the unknown impact that generative AI will have on Search.

Originally Posted December 27, 2023 – #SocialStocks: Reddit falls short of ad revenue target ahead of potential IPO

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