Meta’s continued rally could hinge on fortunes of Temu and Shein

Facebook founder and CEO Mark Zuckerberg meets Founder and Executive Chairman of Alibaba Group Jack Ma (not pictured), at the China Development Forum in Beijing, China, March 19, 2016. 

Shu Zhang | Reuters

Like many Facebook and Instagram users, marketing veteran Victor Lee is inundated with ads from Chinese online retailer Temu when he opens one of his Meta apps.

Recently, he saw a promotion on his Instagram feed for a generic golf bag. Lee, a newbie golfer who’s been shopping for equipment, was intrigued enough to click on the ad. He then landed on Temu’s storefront.

“They know I’m a golf enthusiast,” said Lee, a former senior executive at toy giant Hasbro who is now president of digital advertising firm Advantage United Commerce. “They look on my Instagram, they see I follow a lot of golf players and golf shoes and stuff. You don’t need a lot of tracking mechanisms to know this person likes golf.”

Lee ended up skipping out on the purchase because it wasn’t what he wanted. But his experience is increasingly one that’s shared across Facebook’s massive userbase. Temu and rival Shein are spraying ads across Facebook and Instagram as they try to build their brands and snag consumers from Amazon and Alibaba’s AliExpress. Temu is owned by PDD Holdings, a Chinese company that moved its principal office to Ireland last year. Shein was founded in China and relocated its headquarters to Singapore in 2022.

In reaching U.S. consumers, both companies are taking advantage of lower production costs in China while benefiting from trade rules that exempt them from paying import tariffs on shipments that don’t exceed $800, U.S. lawmakers have claimed.

Lee, who analyzes the digital ad industry even when it doesn’t overlap with his golf pursuits, said using Facebook to pay for downloads is a familiar strategy. Mobile gaming companies have spent big bucks to generate downloads, while discount online retailer Wish and viral video app TikTok have at times flooded users’ feeds with promotions.

“Once they get that download, that’s it,” Lee said. “They’re less reliant on the download, and more reliant on upselling the people that have the app. That’s not a new strategy. They’re just so big and they’re spending so much that you’re noticing this strategy.”

One big difference now is that Temu and Shein are having an outsized impact on Meta’s financials and presenting a potentially distorted picture about the company’s growth rate. As Meta prepares to update Wall Street on Thursday with its fourth-quarter earnings reports, analysts and investors are trying to gauge how much of an impact two online retailers from the China region are having on the company’s top line, and the sustainability of that growth given the limited track record of those clients.

Meta is expected to report revenue growth of 22% for the quarter to $39.2 billion, according to analysts surveyed by LSEG, formerly Refinitiv.

A Meta spokesperson declined to comment for this story.

UKRAINE – 2023/03/11: In this photo illustration, Temu, LLC logo seen on a smartphone and on a pc screen. (Photo Illustration by Pavlo Gonchar/SOPA Images/LightRocket via Getty Images)

Sopa Images | Lightrocket | Getty Images

Rise of the Chinese retailers

Meta bulls recognize the benefit of fresh spending coming from Chinese retailers but say the company doesn’t rely on it.

Chris Mack, a portfolio manager at Harding Loevner, said the rise of Temu and Shein illustrate “the power of Facebook as a platform for reach.” However, he said the company’s hefty cost-cutting initiatives (20,000 job cuts last year), investments in artificial intelligence and more disciplined operations are driving the story on Wall Street. The company has also had two years to adjust to Apple’s changes and develop new ad technologies, helped by AI.

“China has been a sort of a cherry on top of what they’ve been able to do — it just gives that extra tailwind,” said Mack, whose firm owns over $500 million in Meta shares, according to FactSet. “This business works regardless of what happens there.”

Still, every point of growth counts for a company that suffered from three straight quarters of declining revenue in 2022 and is expected to show expansion in the low teens for 2024 far below historic standards.

‘Mafia-style intimidation’

Then there’s the import rule, which Representative Mike Gallagher (R-WI) called a “loophole that is being abused to tilt the playing field against American companies.” Gallagher, who chairs the select committee on China, said in a statement in June that Temu and Shein are “dodging import taxes and evading scrutiny on the millions of goods they sell to Americans.”

In its 2022 annual report, published before the Temu and Shein spending boom really took off, Meta said it generates “meaningful revenue from a limited number of resellers serving advertisers based in China.” The company said revenue could be hurt from action taken by the Chinese government due to issues including “the trade dispute with the United States” and other potential penalties.

Brian Wieser, principal at consulting firm Madison and Wall, said that in highlighting Chinese retailers during its earnings calls, Meta is telling investors “it’s a big risk factor to at least be aware of.”

A Shein spokesperson told CNBC in an email that ad spending was ongoing and that the company “continues to execute a variety of marketing activities globally, including online/mobile marketing such as in-app and email as well as out-of-home advertising.”

A Temu representative didn’t respond to requests for comment.

In a December analysis of Meta’s China-U.S. cross-border ad revenue, Wieser estimated that more than $7 billion in sales last year came from China. The only number Meta provides is for the Asia-Pacific region, which accounted for $6.9 billion in third-quarter revenue, or about 20% of the total.

Meta isn’t the only U.S. internet company effected by the speedy growth from Temu and Shein.

“There’s no question that Temu and Shein are having an impact in the market,” Etsy CEO Josh Silverman told analysts on his company’s third-quarter earnings call. “You don’t get that big that fast without taking share from many people, and I think we and most players in e-commerce have had some impact.”

Silverman added that Etsy has to pay more for digital ads because “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.”

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