Meta vs. TikTok: How they're each using AI to attract advertisers and which one is winning

Published Wed, Jun 7 20236:00 AM EDT

Meta Platforms (META) is trying to beat TikTok at its own game. The Chinese-owned platform exploded on the scene in 2016, using artificial intelligence to drive engagement. Now, Meta is ramping up its own AI capabilities to supercharge its services, including short-form Reels videos on Facebook and Instagram — a strategy that can help it turn the tide on advertising market share lost to TikTok. Club holding Meta has shed incremental share in online ad dollars in recent years during the ascendency of TikTok, a subsidiary of Beijing-based ByteDance. In 2021, Meta captured 22.7% of the worldwide digital ad revenue share; it fell to 20.7% in 2022, according to data by Insider Intelligence. TikTok's small share grew from 0.8% in 2021 to 1.8% in 2022. While clearly dominating in online ads, any tiny bit of share gained by TikTok could be a costly loss for Meta. Reels, which is Meta's answer to Tiktok, was rolled out in stages on Instagram and Facebook from 2020 to 2022. The aim was a similar short-form video service to become more competitive in the space and slow down ad share losses. But those Meta share losses weren't all TikTok-related. They were also attributable to challenges from Apple 's (AAPL) mobile privacy changes that made it more difficult for advertisers to track user behavior. Meta's new AI initiatives are helping them target ads without having to rely on Apple user data. "It's a big deal that Meta has lost share of WW (worldwide) digital ad spending," Debra Aho Williamson, principal analyst at Insider Intelligence, told CNBC in an interview. In addition to TikTok's growth, she said Meta's share has also been impacted by the growth ad spending on other platforms such as Amazon (AMZN), also a Club name. "We expect Meta's share of WW digital ad revenue to stabilize in the next couple years, while TikTok's share will continue growing. We believe that Instagram is what's stabilizing Meta. Facebook is still expected to lose share in the next couple of years but Instagram will regain a few tenths of a point, due to improved Reels monetization and other factors," Aho Williamson said. The big three tech firms Meta, Club name Alphabet (GOOGL) and Amazon all have roughly 75% of the share in the digital ad spending market. While "still early its revenue journey … TikTok's usage and engagement continue to grow faster than FB's properties," Rohit Kulkarni, analyst at Roth MKM, said in a CNBC interview. "Any market share loss implies Meta is growing slower than the overall market, and any slight loss today tends to be perceived as a significant negative for long-term outlook," Kulkarni explained. "This is a key leading indicator for monetization, and any incremental results from AI-driven targeting and measurement would accelerate the market share shift." Meta, however, could see improvement on year-over-year declines by attracting more advertisers through its new AI-powered offerings that are proving to be a major catalyst for its ad business. "Throughout 2022, Facebook has been losing market share in terms of ad dollars to TikTok," Roth MKM Kulkarni said. "We believe since the beginning of this year, that market share loss has started to slow down and probably will start to reverse as we get into the second half of this year." META YTD mountain Meta Platforms (META) YTD performance Oppenheimer also sees Meta's AI adoption as a catalyst for growth, saying in a research note Monday that it's "well positioned to drive higher pricing and engagement from AI investments" through next year. Oppenheimer analysts raised their price target on Meta to $350 per share from $285. That's nearly 29% higher than Friday's close and would be on top of a year-to-date gain of around 125%. Oppenheimer reiterated its outperform (buy) rating on the stock. JMP Securities said Monday that Reels is "capturing incremental engagement" and driving share gains at Instagram. The analysts boosted their Meta price target to $300 from $270, while keeping their outperform rating. To be sure, artificial intelligence is still a nascent technology, and more research is being done in the AI community to build more effective and responsible language models. RBC Capital Markets analyst Brad Erickson told CNBC he sees AI as "a tailwind for the industry as opposed to a competitive differentiator." At the same time, Meta arguably has the competitive edge over TikTok given the amount of data it possesses from each of its users. "Facebook has a much deeper social graph around their user base," Erickson said. Facebook's data set gives it a "structural data advantage," which ultimately provides it with a "foundation for producing better AI results over time," he added. In a digital advertising market where growth is limited, the battle for market share gains is critical. Here's a breakdown of both Meta and TikTok's strategies and how Meta is rising to the challenge. Meta's AI Strategy Meta has been using AI on two fronts: to serve its advertiser customers and to improve performance across its own social media platform. Meta has rolled out AI-centric tools to help companies better measure their return on ad-spend and manage their campaigns. Under Meta Advantage and Advantage+ , advertisers can use a suite of products aimed at improving performance by automating, optimizing, and personalizing ads through Meta's AI and machine learning capabilities. For its own business, Meta has been integrating generative AI into its social media products to enhance content recommendations and ad targeting. "Both these changes are helping Facebook find market share loss they experienced over the last 18 months versus TikTok," Kulkarni said. "We see that as a significant positive heading into the second half." Notably, the company is using AI to deliver personalized recommendations and rankings for Reels on Instagram and Facebook. During Meta's first-quarter earnings call, management said AI recommendations drove increased overall platform usage and led specifically to Reels monetization efficiency gains of more than 30% on Instagram and more than 40% on Facebook on a quarter-over-quarter basis. While still monetizing at a lower rate per time spent compared to the more mature Feed and Stories, Meta expects Reels to become neutral to overall ad revenue by the end of this year or early next year. Citi named Meta its top online advertising pick following results from the research firm's proprietary surveys of media buyers and advertisers. Meta was ranked the No.1 platform for return on investment. Analysts believe advertisers preferred the tech company's new ad innovations like Advantage+, Click-to-message and Sponsored Reels. The Citi survey indicated 43% of media buyers cited Meta for unlocking top ad spend while only 27% cited TikTok. Despite recent progress, Meta is still in the early stages of seeing a direct impact of generative AI on ad performance, Kulkarni said. "We might see benefits in the second quarter earnings from the recently announced gen AI tools for advertisers," he explained. In the meantime, Reels is still a drag on revenue. But as engagement rises and Meta gets better at content curation that "revenue headwind will slowly start to diminish," Kulkarni predicts. He estimates Reels is six to 12 months away from turning into a revenue tailwind. AI is a winning strategy so far, not only for the company but also for META's share price, which has rallied more than 125% year to date to around $273. A large part of that gain can also be attributed to CEO Mark Zuckerberg's execution of his "year of efficiency" — doing more with fewer employees and less spending and stricter cost controls. TikTok's AI strategy TikTok has seen a quick rise in viewership by virtue of predictive AI for content recommendation. Through its machine learning algorithms, it curates a personalized feed for every user based on the content they interact with, time spent interacting with each video, as well as monitoring the content they don't interact with. "TikTok's AI playbook is putting the right content in front of the right people at the right time," Kulkarni said. It's a formula that ultimately makes TikTok extremely addictive with highly engaged users who also make the social media platform an increasingly popular destination for advertisers. (Of course, TikTok's Chinese ownership has made it a target of political ire .) "TikTok users spend 25% more time before scrolling through ads compared to other platforms," Roth MKM analysts gathered from the social media platform's annual TikTok World 2023 conference in early May. "Also, TikTok comes in 33% more positive from a brand sentiment perspective with 73% of users feeling a deeper connection to brands on TikTok versus other platforms." One of the main reasons is TikTok's focus on fostering a brand-friendly creator marketplace. Roth MKM cited a survey conducted by TikTok that found creator-branded content carries a 24% brand favorability, 18% brand recommendation, and 17% purchase intent compared to other social media platforms. (Meta also has a payout model for Facebook and Instagram Reels creators based on the number of plays the video gets.) TikTok advertisers can place ads through the platform's TikTok Ads Manager , offering automatic audience targeting and measurement tools. TikTok's video shopping ads is another option that allows users to make their videos "shoppable." This feature is driving higher conversions, where two out of three users are likely to make a purchase on TikTok, Roth MKM analysts said. TikTok is also testing an AI chatbot called Tako in certain markets, which allows users to ask questions about the video their viewing and suggest different videos to watch based on their inquiries. The platform announced a limited rollout in late May. Legal battles TikTok may be a victim of its own success with politicians in the U.S. and around the world calling for — and, in some cases, instituting bans due to distrust of the platform's Chinese owners. Montana has become the first U.S. state to prohibit TikTok. The ban there is set to take effect on Jan. 1. Back in March, President Joe Biden threatened to ban TikTok in the U.S . over concerns the company could pass along American user data to the Chinese government. The app has already been banned on U.S. government devices. In an attempt to show the U.S. government it won't compromise U.S. user data, TikTok last year announced it's moving American user data to an Oracle -controlled cloud platform. While a headwind going forward for TikTok, the ongoing political debate could be a boon for Meta. "If this headline risk stays, heading into next year, it's definitely not good for business [at TikTok]," Kulkarni said, adding some advertisers could "pull back budgets because of the uncertainty such a climate brings." That could, in turn, attract more advertisers to Reels on Instagram and Facebook and boost Meta's ad revenue. Meta, however, is also facing its own legal challenges. In late May, Meta was fined $1.3 billion by European privacy regulators over the transfer of user data from European countries to the U.S. Meta plans to appeal the ruling. For now, things are business as usual, but we're keeping watch on how this lawsuit develops. Bottom line Meta is an undeniable AI leader that has a lot more to showcase as it continues to research and develop new AI-powered products. While TikTok has adeptly implemented its own AI strategies to attract users and advertisers in a short period of time, we believe Meta has recently gained the upper hand in the long-term in leveraging AI effectively given its resources, commitment to the field, experience, and massive amounts of user data. Those are areas in which TikTok is underdeveloped. Meta has also been able to more effectively use AI to navigate the changing ad market and overcome the challenges from Apple's mobile privacy changes — changes that made it more difficult for advertisers to track user behavior. AI technologies have been a catalyst for many tech companies this year, but Meta is a standout since forging a path to bring AI to the mainstream. The company recently announced that it's open-sourcing its latest AI technology to the public so researchers can build customized chatbots. Overall, we're pleased to see Meta's commitment to AI and trust that the Facebook and Instagram owner can further boost user engagement on Reels to recover lost digital ad revenue market share. (Jim Cramer's Charitable Trust is long META, AMZN, GOOGL, AAPL. 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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