Meta's Ad Costs Are Rising: What It Means for Your Budget

Episode Transcript

00:00:00 - 00:00:24
Chris: Welcome to another episode of Growing Ecommerce. Today we’re going to look at markets. We’ll be talking about earnings from Google, Amazon, and Meta—specifically their ad and commerce businesses. We’ll also be talking about Shein’s IPO and what we know about it so far. Do they still earn money? Did they ever? Let’s get into it.
Mike: Yeah, okay.

00:00:24 - 00:00:45
Chris: How am I, Chris? Yes. Mike here. Chris, good? Yeah. Well, I’m Chris, you’re Mike. Let’s roll. All right, good. We’re not mixed up today, Mike.
Mike: Yeah, I think I need a refill. Let’s not go down this road again. We know who we are.
Chris: But does Meta know who they are? Do they know what their strategy is?
Mike: Yeah.

00:00:45 - 00:01:06
Mike: Should I start with Meta, or do you want to start with Meta?
Chris: Let’s start with you. You’re not happy with the earnings call?
Mike: No, no one is.
Chris: Who is?
Mike: I don’t know. I don’t have a short position, and I have no personal interest in this.

00:01:06 - 00:01:36
Chris: So the earnings call wasn’t positive?
Mike: No.
Chris: Tell me why from your perspective.
Mike: From my perspective, I mean, their revenue was up—it was up a lot. Their ad revenue is basically all of their revenue, right? If we do the math here, it’s $59.4 billion out of $60.8 billion, which is around 96% or 97%, something like that.

00:01:36 - 00:01:58
Chris: So they are highly dependent on their ad business. We’ve talked in the past about Mark’s historic disrespect for advertising, saying things like, “I don’t want to talk with the ads guys, you’re just unimportant.”
Mike: Yeah, yeah.
Chris: But they are incredibly important; it’s the definition of a core business when it makes up 97% to 98% of your overall revenue. Again, they saw an almost 30% year-over-year jump.
Mike: Yes, let’s face it, this is absolutely amazing.
Chris: Amazing.

00:01:58 - 00:02:29
Mike: Especially if you compare the growth rates to Google’s ad business. They are eating the big players’ lunch, especially in the digital marketing space. We talked about how this year Meta is on track to overtake Google in terms of ad revenue, and Google is likely salty about it and will try to do something. But okay, so the growth rates are absolutely outrageously good, yet the stock still got punished.
Chris: Yeah, how come?

00:02:29 - 00:02:51
Mike: Well, I think that’s why I asked if Meta knows who they are. This goes back to when they renamed themselves Meta because they wanted to be a metaverse company. It’s like when you get an embarrassing vacation tattoo on purpose. I think the tattoo was right on the face, Mike Tyson style. But now they’re not a metaverse company anymore; now they’re an AI company, right?

00:02:51 - 00:03:10
Chris: Yeah, of course. They are a super successful ads business; you can’t argue against that. By the way, shout out to them because we see it on an everyday basis: Meta has really become an equal option to Google whenever someone is planning a digital ads budget. Meta is right up there as a major channel to look at, and they made this transition extremely well. I can remember years ago when they had that first earnings call where, for the first time in history, their new user growth flatlined. They got punished so hard.
Mike: Yes.
Chris: But they turned it around by becoming this incredible ads machine. Shout out to the big man. This transformation, whether they did it on purpose or gaslighted everyone with the Meta rebranding, has resulted in an ads business that is doing extremely well.
Mike: Yeah, it is what it is.
Chris: Yeah, it’s just they’re spending way too much of their money.

00:04:16 - 00:04:34
Mike: I mean, honestly, they can still afford to do that more or less indefinitely, to be perfectly honest. But the question is, where is that headed? That’s why I really respect Apple for kind of stepping away from that stuff. But let’s face it, we had this discussion, right? When we talk about a bubble…

00:04:34 - 00:05:02
Chris: The question is—and your argument that we are in the midst of a bubble highlights this—the strongest indication or effect is that the CapEx to EBIT ratio has never been worse, right? It’s actually crazy. EBIT margins are declining because CapEx is increasing way faster than the companies can grow.
Mike: Of course.

00:05:02 - 00:05:28
Mike: Yeah, talking about Meta, their CapEx grew 55% year-over-year. 55%! And they were already spending billions of dollars last year, so it’s not like it was a small base. This is something I think institutional investors get nervous about: what is the monetization strategy? Like you said, they can do this for years, right? But the question remains, where is the return on this AI CapEx? I think Google, on the other hand, also got punished because their CapEx is skyrocketing, but I see a way more straightforward monetization strategy with regards to AI on Google’s side than Meta’s, for sure.
Chris: Okay, maybe we can touch base on that, because all the AI-based campaign types are creating revenue for them already.

00:05:58 - 00:06:23
Mike: Yeah, absolutely, convincingly so. Before we move on from Meta, I want to discuss one bear thesis that you and I were talking about before recording. The question is, where does that 27% growth come from?
Chris: Yes, and it’s not really from new users.
Mike: Exactly, which is a very good point. That’s bad.

00:06:23 - 00:06:52
Chris: Because where it is coming from is impressions. Impressions are up. If users are not up but impressions are up, you know what that means for the average Meta user.
Mike: Yeah, the ad load is increasing and the frequency is increasing, which is not necessarily a positive thing.
Chris: Not necessarily. Especially for Meta, because Meta is still seen as a personal social media platform. I’m not deliberately jumping on Meta to look for a product; that’s what I do with Google. So if the original reason why I’m using Meta is eroding because it is becoming purely an ad platform, there is a risk that users will jump ship. The question is, where is the growth coming from?

00:06:52 - 00:07:18
Chris: Because there’s a limit to increasing your share of wallet with a given average Meta user before they feel it’s too much.
Mike: Yeah, and personalization is key to helping fight that. I haven’t used Facebook in many years, but on Instagram, even though I’m not there to look for products, they know my interests really well—better than anyone else.
Chris: Yeah, the targeting is usually pretty good, except for when Temu is just spamming things. But that’s old news; they break everything.
Mike: Yeah, but Temu isn’t doing that as much anymore.
Chris: Exactly. By the way, one last thing for the listeners: what are you taking away from this as an online marketer? Meta is not going bankrupt anytime soon. The biggest takeaway is that the growth is coming from increasing the share of wallet per average Meta user, which might lead to some friction on the consumer side. Also, CapEx compared to growth led to a net income drop of 14%.
Mike: Yes, they still had a net income of almost $16 billion, but you can see this trend line for sure.
Chris: And impressions are up, but ad unit costs are up as well. So that is a major takeaway.
Mike: Yeah, it’s getting more expensive even though impressions are up.
Chris: We can get into the reasons why, but let’s move on. On the user side, it’s not great if the ad load is too high, and on the advertiser side, if it starts getting expensive, it really needs to perform. Maybe we can look at this in one of the next episodes. I would be really interested because this is a good segue to Google. We see what drives their ad revenue: it’s new, powerful campaign types. What is the campaign type strategy on Meta’s side? We talked about the stalling of Advantage+.
Mike: Advantage+, yeah.
Chris: Where is the new campaign type that drives growth? Maybe we can look into it.
Mike: Definitely. They have their own AI for targeting, though I’m blanking on what it’s called right now, but we can talk about that. Maybe that’s where some of the gains have come from. But I think this is a great segue to our beloved company of the big three.
Chris: Yes, let’s state the obvious: Google Cloud is on fire.
Mike: Yes, it is what it is. Cloud revenue accelerated by an insane 80% year-over-year. I think they are doing fine with Cloud.
Chris: And that’s a path for them to monetize their AI; it doesn’t all have to get monetized through ads. But their search ad revenue is also up 17% to over $60 billion.
Mike: So, solid.
Chris: Solid, exactly. But it has decelerated for the first time in several quarters.
Mike: That’s true, it’s the slowest growth in a long time, though still 14% overall. There was an analyst on the call—and we’re going to table this for the next episode—who asked how a 17% growth rate is even possible considering how massive Google already is.
Chris: Yeah, it’s a fair question. The answer is what I liked about it: they tied this unfathomably strong growth rate to their major capital expenditures going into new AI-based campaign types.
Mike: Yes, first and foremost, Performance Max, which is driving billions of net-new searches that weren’t really monetized before.
Chris: What does that mean on an operational level, Mike? How does Performance Max monetize those search terms?
Mike: Hold on, quick pause. Do we want to talk about this now or table it for the next episode?
Chris: Let’s table it for the next one.
Mike: Okay, let’s leave the question there and answer it next week.
Chris: Yeah, it’s a super interesting question. We only have so much time in this episode, so let’s save it for next week. Cliffhanger, baby!
Mike: Cliffhanger! The positive takeaway is that one of their major new campaign types is actively driving growth for them.
Chris: Yes, and as a call to action, if you haven’t subscribed yet, please do so you can hear the answer next week. Anything else noteworthy about Google’s earnings?
Mike: Yeah, YouTube ads were strong, up 13% to $11 billion alone. Crazy. On the other hand, the Google Network—like AdSense, AdMob, and open web programmatic display partners—is shrinking.
Chris: Yeah, probably on purpose because they just don’t care as much. That’s a long-term trend.
Mike: Yes, it’s down about 1% year-over-year, and as a share of the overall ads business, it’s on a long-term downward trend.
Chris: True. Google’s CapEx is also crazy. They held onto their projection of roughly $200 billion in CapEx for the fiscal year. It’s completely insane, and the stock got punished because of that fear. However, with Google, I have a much better understanding of where that CapEx is going. They had their identity crisis with Bard, which we talked about, but now a year into AI Overviews, they are still up 17%. You can forget that bear thesis; they have a clear path to monetizing this stuff.
Mike: Yeah, compared to Meta, which has an identity crisis alongside massive CapEx, I’ve been bullish on Alphabet for quite some time. In one of our first podcast episodes, we questioned where Google was going because there was no clear path. Now they have the path, and they are executing the shit out of it.
Chris: Yes. In the last earnings call, Sundar Pichai literally said Gemini is everywhere. I think he mentioned that about 20 billion API tokens are processed per minute. So even though they are spending $200 billion in CapEx, it’s going directly into the core of the business.
Mike: Yes, and the crazy thing too is they mentioned that serving commodity AI—like the AI in AI Overviews—isn’t as expensive as people think. With their custom TPUs, they are serving this at virtually no cost.
Chris: That move to create their own chip power is vertical integration at its finest.
Mike: Yes, and I’m not optimistic about competitors who aren’t Google in this regard because TPUs are just so good. To sum up, Google’s search revenue and overall revenues are up. They aren’t sending as much traffic to the open web, focusing instead on maximizing their owned and operated properties. That’s why despite the crazy CapEx, I’m super bullish on this company. The stock price dip is just short-term noise because they had a massive top and bottom-line beat compared to street expectations. They are investing heavily in a massive core flywheel.
Chris: Amen, I agree completely. Let’s move on to Amazon.
Mike: Amazon was also up a whopping 26%, reaching $19.8 billion—let’s just call it $20 billion—in advertising revenue.
Chris: I love all these billions flying around.
Mike: Amazon is doing incredibly well, and they are not going bankrupt anytime soon. Sponsored Products remain their largest ad offering and are performing strongly. Their ads business is robust just about everywhere.
Chris: Exactly. Let’s transition to Shein, who just released their prospectus documents as they inch closer to an IPO. What’s your reaction to that?
Mike: We’ve talked a lot about Shein and how the ads business works in general. What I see with Shein is a tough space to be in. Their model was entirely built on a massive growth story, but that crumbled recently with regulatory shifts like the changes to the de minimis exemption. It disrupted their core business model, and now they are in a very difficult position where they can’t sustain those prior growth rates right before going public.
Chris: 100%. I’ve been criticizing their heavy dependence on the de minimis exemption for a long time. Some people argued that they were transitioning to local sellers and making investments there, but the data shows they were still completely dependent on it. The EU and US have acted forcefully on this, which is a good move. Shein has smart people and will find a way to survive, but the question is whether they can accelerate growth again at a profitable level. When you are crawling around a 1% EBIT margin compared to groups like Inditex crossing 20% margins while growing, it’s hard to convince institutional investors.
Mike: Exactly. If a company isn’t growing fast and isn’t highly profitable, what is there to like? Over the weekend, a friend of mine who works for a successful Nasdaq-listed company mentioned they operate on the “Rule of 50”—where the combination of revenue growth rate and EBIT margin should equal 50. If you aren’t growing, you better be highly profitable. This is the exact crisis Shein is facing.
Chris: It also revealed their total dependence on advertising. They spent $6 billion in total marketing costs in 2025, and roughly 95% of that was direct ad spend. Whenever they pull back on ad pressure, their organic traffic fails to compensate. They had a clear value proposition with massive selection and rock-bottom prices, but it wasn’t enough without massive ad scale.
Mike: That’s what surprises me, because customer acquisition costs have essentially tripled if you look at the top-line numbers. Do you know if there’s any news on whether the IPO is delayed?
Chris: I believe it got delayed, but we’ll have to double-check. That wraps us up for the Q2 earnings recap. As long as Google and Meta are growing double digits, the digital marketing world is stable. We should only worry when that growth drops to single digits.
Mike: Should we be concerned that the modern economy depends so heavily on the ad revenue of giant tech platforms? Maybe. That’s up for discussion. Thank you, sir.
Chris: Thank you, Mike. Thanks, everyone, for listening. This has been another episode of Growing Ecommerce, brought to you by [Smarter Ecommerce](https://www.smarter-ecommerce.com. You can learn more at smarter-ecommerce.com. If you leave us a review, a comment, or a shout-out on LinkedIn, we really appreciate it. Thanks, and we’ll see you next time.
Mike: Great.