Meta Platforms gets billions from China without headaches many U.S. companies face there

Published Mon, Apr 22 20246:00 AM EDT

As many American companies struggle to navigate the world's second-largest economy, Meta Platforms has found itself raking in billions of dollars from China without the direct challenges of doing business there. The Facebook and Instagram owner got 10% of its overall revenue from China-based advertisers last year, up from 6.35% in 2022, according to the Club holding's annual report. A significant chunk of that haul is believed to be from online retailers Temu and Shein, which are aggressively marketing their low-cost products to American and European customers. Not only have they flooded social-media feeds, Temu also spent millions of dollars on Super Bowl ads, and Shein is partnering with U.S. retailers and wants to go public . The influx in spending from Chinese ecommerce advertisers has been a "significant positive" for Meta, said Rohit Kulkarni, analyst at Roth MKM covering internet companies. Meta's first-quarter earnings report — set to be released after the bell Wednesday — will offer investors a fresh look at whether that benefit continued into 2024. Temu and Shein are turning to Meta and other platforms in search of new markets due, in part, to tapped out local demand and bloated inventories, according to Piper Sandler analyst Tom Champion. Many American companies doing business in China have battled similar challenges as the post-Covid recovery there has progressed slower than expected. That includes Club holding Estee Lauder , which has suffered from soft demand in its key Asian travel retail segment. And with consumer confidence muted, fellow Club holdings Starbucks and Apple have ceded ground to local brands offering cheaper alternatives. Meta's apps are blocked in China — Facebook has been banned in the country since 2009 — so in some ways the economic headwinds there have become a tailwind for the U.S. tech giant's massive advertising business. Its much-smaller hardware unit is reportedly set to enter the Chinese market later this year through a partnership with Tencent. China-based advertisers were responsible for five percentage points of Meta's worldwide revenue growth of 16% in 2023, an important bounceback year for the company after posting an annual sales decline in 2022. Meta's revenue from China totaled $13.69 billion in 2023, up 85% year over year from $7.4 billion in 2022, the company said in its annual report filed in February. In 2021, the figure stood at $7.59 billion. Meta has said it has a "diverse advertiser base" of Chinese companies. "I think we know that spend from a few of our larger advertisers has been an important contributor to strength in China broadly," CFO Susan Li said on a February call with analysts. "But in fact, two-thirds of our China ad revenue came from advertisers outside the top 10 spenders in that country in 2023." Meta declined to comment further for this story, citing the proximity to Wednesday's earnings report. Temu is owned by Chinese tech giant PDD Holdings , which is listed on the Nasdaq stock exchange. PDD, which operates discount e-commerce platform Pinduoduo in China, moved its headquarters to Ireland from Shanghai last year. Shein was founded in China by more than a decade ago, but relocated its headquarters to Singapore several years ago, the company previously told CNBC . Temu did not immediately respond to CNBC's request for comment on their international expansions and use of Meta's ad platforms to attract customers. Shein declined to comment. META .SPX 1Y mountain Meta's stock performance over the past 12 months compared with the S & P 500. The geopolitical tensions between China and the U.S. are one risk to Chinese advertisers spending on Meta's apps, even if some industry experts believe it may not be interrupted imminently. "That's not an immediate threat but one of those things that we watch in general and could potentially have an impact," Kate Scott-Dawkins, global president of business intelligence at media investment firm GroupM, said in an interview. U.S. lawmakers on both sides of the aisle and business groups have attacked a trade provision — decried as the "de minimis" loophole — that allows packages with retail value under $800 to avoid import tariffs. Temu and Shein capitalize on that rule with their shipments to U.S. shoppers, which BTIG retail analysts said in a recent note is a key competitive advantage for the companies, helping them offer such low prices on products. In its latest annual report, Meta also said it is possible the Chinese government could take action that "reduces or eliminates our China-based advertising revenue" for reasons that include a trade dispute with the U.S. The other side of the sustainability question for investors is how long will it be financially viable for the likes of Temu and Shein to pour money into digital advertising on Meta's platforms. In some ways, the heart of the issue is whether the companies are "growing at all costs to drive share gains, and if the business models are ultimately sustainable," as BTIG analysts said in the same note. Wall Street analysts and ad industry experts forecast this advertiser base will remain a prominent source of revenue for Meta at least for the rest of 2024, helping to support sales and earnings growth in the coming quarters. That, in turn, could lead to further gains for Meta's stock, which has more than doubled over the past 12 months. As long as Chinese online retailers are looking for customers in international markets, the companies "will stay very aggressive" in spending on Meta's platforms because they remain the go-to-place for businesses to acquire new customers, Roth's Kulkarni said. In the fourth quarter, Meta had 3.19 billion daily users across its apps. Piper Sandler's Champion believes robust ad spending from the Chinese resellers will continue throughout 2024 because the need to export excess goods remains. The Chinese economy has been grappling with a distressed property market and sluggish domestic consumption, which seemingly lack quick fixes. "These goods have to get flushed somehow. If they're not going to get consumed domestically, the international market is really the only solve," Champion said in a CNBC interview. A worry among smaller American advertisers is how competition from Chinese marketers could impact their ad performance. The concern is that as more Chinese advertisers target American consumers through Meta's platforms, that could drive up the price of ads for everyone. The CEO of Etsy, Josh Silverman, suggested last fall that could be playing out. "I think those two players are almost single-handedly having an impact on the cost of advertising, particularly in some paid channels in Google and in Meta," he said on Etsy's November earnings call, referring to Shein and Temu. That would seem to be a positive for Meta, but the risk is that if the ads got more expensive and smaller businesses didn't see a commensurate increase in return on investment, perhaps they would cutback their spending or look elsewhere to place ads. While the Club isn't writing that prospect off entirely, we're not expecting to see advertisers revolt or anything close to it, given the scale Meta offers and the company's continued embrace of artificial intelligence to improve ad targeting and return on investment. Meta is where the eyeballs are. For his part, Piper Sandler's Champion doesn't think Chinese advertisers are crowding out other marketers given Meta's ad prices have remained "relatively flattish," according to his checks. Looking ahead to the first quarter, "pricing remains relatively benign... and we expect that dynamic to continue," Champion said. (Jim Cramer's Charitable Trust is long META. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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Founder and CEO of US online social media and social networking service Facebook Mark Zuckerberg reacts upon his arrival for a meeting with European Commission vice-president in charge for Values and Transparency, in Brussels, on February 17, 2020.

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