Earnings reports released on Thursday! Will Temu and Shein shake up Meta Platforms' revenue landscape?

Zhitong App has learned that Chinese online retailers Temu and Shein are heavily advertising on Meta Platforms and Instagram, both owned by Meta Platforms, in an attempt to build their brands and snatch consumers from Amazon (AMZN.US) and Alibaba's AliExpress. It is understood that Temu is owned by PDD and relocated its main office to Ireland last year, while Shein was established in China and will move its headquarters to Singapore in 2022.

Victor Lee, a veteran in the marketing industry, said that different types of companies, including gaming companies, online retailers, and social media applications, use the Meta Platforms to promote their products or services and increase the downloads of their applications through advertising on Meta Platforms. This strategy indicates that Meta Platforms, as an advertising platform, can help these companies achieve their marketing goals, especially in increasing user downloads and engagement.

Lee said, "For many companies, the main purpose of advertising is to attract users to download their applications. Once users have downloaded the applications, companies will shift to another strategy, such as offering discounts and launching new features, to encourage these existing users to make more purchases or engage more." Lee pointed out that although this shift towards more sales is not novel, the significant investment of these companies in advertising has made this strategy more prominent and eye-catching.

Furthermore, the advertising efforts of Temu and Shein are currently having a significant impact on Meta's revenue, which may lead to an inaccurate understanding of Meta's overall business growth. As Meta prepares to release its fourth-quarter earnings report after the market closes on Thursday, analysts and investors are trying to assess the overall contribution of the advertising efforts of these two companies to Meta's revenue and considering whether this growth is sustainable, especially given the relatively short presence of these customers in the market.

According to analysts surveyed by LSEG (formerly known as Refinitiv), Meta's revenue is expected to grow by 22% this quarter, reaching $39.2 billion.

What is the impact of Temu and Shein on Meta?

Temu was launched in 2022, while Shein was established in 2012 and only recently started actively advertising on social media.

Meta's CFO, Susan Li, stated during the previous earnings conference call in October that the company "benefits from Chinese advertisers spending to reach customers in other markets," echoing her comments in April. Although Meta did not explicitly mention Temu and Shein, considering their recent explosive growth, analysts widely speculate that they are the main drivers behind the increase in sales.According to JMP analysts, in the third quarter, Temu and Shein invested approximately $600 million and $200 million in advertising on Meta Platforms and Instagram, respectively. JMP claims that this means they account for about 3% of Meta's total growth during the same period.

According to research by data.AI, Temu's downloads reached 73.87 million in 2023, an increase of over 500% compared to last year. Shein's downloads during this period increased by about 52% to reach 36.93 million.

Prior to the release of the earnings report on Thursday, Meta was on an upward trend. It is worth mentioning that the company experienced a nearly two-thirds decline in market value in 2022 due to soaring inflation, rising interest rates, and a significant rotation out of tech stocks. Additionally, the company was also impacted by Apple's privacy changes for iOS at the end of 2021, making it more difficult for brands to accurately understand user demand.

Now, Meta has reached new all-time highs last week and continues to rise this week. Investors who hold an optimistic view of Meta and believe that its stock price will rise have taken note of the new advertising expenditures from Chinese retailers such as Temu and Shein, but they emphasize that Meta's business and financial health do not solely rely on these Chinese retailers' advertising spending.

Chris Mack, portfolio manager at Harding Loevner, stated that the rise of Temu and Shein demonstrates "the power of Meta Platforms as a widely covered platform." However, he noted that the company's significant cost-cutting measures (laying off 20,000 employees last year), investment in artificial intelligence, and more disciplined operations are driving the Wall Street narrative. The company also has two years to adapt to Apple's changes and develop new advertising technologies with the help of artificial intelligence.

According to data from FactSet, Mark, a manager of a company holding over $500 million worth of Meta shares, stated, "The Chinese market is like icing on the cake for them in terms of what they've already achieved—it provides additional momentum." He also added, "Whatever happens there, the business will continue to operate."

However, despite this, every bit of growth is important for a company that experienced three consecutive quarters of declining revenue in 2022 and is expected to have a growth rate in 2024 that is only in the low double digits, far below historical standards.

What impact do Temu and Shein have on the e-commerce market?

Zhitong App learned that Brian Wieser, the head of consulting firm Madison and Wall, estimates that over $7 billion in cross-border advertising revenue came from China in the United States last year. The only data provided by Meta is for the Asia-Pacific region, where third-quarter revenue was $6.9 billion, accounting for about 20% of total revenue.However, Meta is not the only American internet company affected by the rapid growth of Temu and Shein.

"There is no doubt that Temu and Shein are having an impact in the market," said Josh Silverman, CEO of Etsy, during the company's third-quarter earnings conference call. "You can't achieve such rapid growth in such a short period of time without taking market share from many others. I think we and most participants in the e-commerce field have been affected to some extent."

In addition, Amazon has been inviting other companies to use its platform to promote market competition. Juozas Kaziukenas, CEO of e-commerce intelligence company Marketplace Pulse, stated that Chinese sellers are buying related advertisements to help enhance Amazon's growing advertising business.

Kaziukenas said, "People really misunderstand and underestimate how much the advertising industry relies directly on China."

At the same time, Rishi Shiva, co-founder of growth marketing company Pinebone, also stated that Temu and Shein are willing to spend in ways that other brands cannot. Shiva mentioned that the iOS privacy updates have increased the cost of running effective campaigns, leading many companies to reduce their spending on Meta Platforms in recent years.

Shiva said, "In the era of Wish, anyone with an app would advertise on Meta Platforms." He explained, "Any company launching an app would use Meta Platforms, trying to attract as many users as possible."

On the other hand, both Temu and Shein currently have sufficient funds and are actively investing in advertising. Analysts estimate that Shein's annual sales exceed $30 billion, while Temu's revenue in 2023 may have already surpassed $16 billion. According to Mack, there is no better advertising platform for them than Meta Platforms.

He said, "Whether it's TikTok, mobile games, or e-commerce advertising, Meta Platforms provides the widest coverage channel."