Amid all the scandals and controversy, Facebook Inc watchers were on tenterhooks going into the company’s most hotly anticipated quarterly report in years. In the end, it fell a bit short. But with many expecting far worse, sometimes avoiding disaster is good enough. Late Monday, the social-media company posted third-quarter sales figures that slightly missed Wall Street’s expectations. Revenue in the period ended in September rose 35% from a year earlier to $29 billion, below the $29.5 billion median estimate of analysts surveyed by Bloomberg. Facebook also gave a revenue guidance range for its current quarter of $31.5 billion to $34 billion, again below the $34.8 billion median forecast. It also announced it would break down the financials for Facebook Reality Labs, its augmented and virtual reality division, starting in its fourth quarter. After the report, Facebook shares rose by more than 3% in after-hours trading.
Ahead of the numbers, there were two main concerns on investors’ minds: the impact of global supply chain bottlenecks and Apple’s recent privacy tracking change. Facebook said supply-chain disruptions and labour shortages were hurting its business. It makes sense. Companies won’t want to plough money into advertising for their products if they have limited inventory to sell. While this challenge may make for a difficult holiday period, it’s likely to be a short-term phenomenon.
Apple’s privacy feature is a thornier problem. Over the summer, the smartphone major rolled out its requirement that developers ask users to sign off on tracking their online activities. With many consumers opting out of tracking, marketers—including Facebook’s clients—are having trouble targeting their ads without their usual access to behavioural data. But Facebook should eventually figure out a way to deal with it. Earlier this year, CEO Mark Zuckerberg said Apple’s move could benefit the company if it drives more businesses to sell directly on its platforms. That would let Facebook gather more valuable first-party data—on user behaviour and transactions done via its apps, for example.
To that end, Facebook has been moving aggressively to develop e-com-related tools and services for merchants over the past two years, from its partnership with Shopify that enables small businesses to create online stores easily, to adding messaging features for businesses using WhatsApp. It will take time, but Facebook should be able to successfully monetize online commerce-related services at some point.
Beyond the concerns over declining usage by teenagers, Facebook dominates the social media landscape. Take older age groups. Frances Haugen’s whistleblower documents revealed 127 million Americans over the age of 30 check Facebook’s main platform daily. Such engagement won’t disappear overnight. And with nearly three billion consumers using its services monthly, it remains one of the few platforms that can provide marketers with interest-based ad targeting at large scale.
Its earnings likely won’t be the only big news from Facebook this week. On Thursday, the company is scheduled to hold its annual augmented reality and virtual reality conference, Facebook Connect. It may even unveil a name change.
Meanwhile, Facebook faces intense antitrust and regulatory scrutiny. If lawmakers pass legislation that forces it to change its algorithm to a less engaging chronological feed, it would scrimp its business model. But given Congress’s track record, the likelihood of it is low. This means that in the short term, the Federal Trade Commission is Facebook’s primary regulatory threat. Along with the agency’s antitrust lawsuit which it re-filed two months ago that seeks to break up the company, the agency could investigate whether Facebook’s ad-based business model rooted in collecting user data violates privacy laws. And at the very least, Facebook seems likely to dramatically raise its content moderation spending due to public pressure. While the company has repeatedly said it has spent more than $13 billion on safety and security over the last five years, that figure is just 4% of its sales in the time frame. It should do more.
But even if Facebook spends billions more on moderators or is forced into some behavioural remedies, much of the downside may be priced into its shares. After a decline in recent months, the company’s shares now trade at roughly 20 times the fiscal 2022 earnings consensus. Analysts still expect the company to grow sales at double-digit rates over the next two years. If so, it makes the current valuation attractive compared with big technology peers. Apple is valued at 26 times forward earnings, for example, and is only expected to grow its revenues by 3% next year. So, it’s hard to argue that investors should abandon Facebook right now.
Tae Kim is a Bloomberg Opinion columnist covering technology. Source: Bloomberg