Facebook Calms Investors Despite Onslaught of Bad News

(Bloomberg Opinion) -- Amid all the scandals and controversy, Facebook Inc. watchers were on pins and needles 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. The company also announced it would break out the financials for Facebook Reality Labs, its augmented and virtual reality product division, starting in its fourth quarter. Following 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 Inc.'s recent privacy tracking change. Like Snap Inc. the previous week, Facebook said supply-chain disruptions and labor shortages were hurting its business. It makes sense. Companies won't want to plow 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 as manufacturers and delivery companies build up more capacity next year.

The Apple privacy feature is a thornier problem. Over the summer, the smartphone giant 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 customers — are having trouble targeting their ads without access to the behavioral data.

But Facebook should eventually figure out a way to deal with the policy change. 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 allow Facebook to gather more valuable first-party data — including collecting user behavior and transactions conducted inside its apps.

To that effect, Facebook has moved aggressively to develop e-commerce-related tools and services for merchants over the past two years — from its partnership with Shopify that enables small businesses to easily create online stores to adding messaging features for businesses inside WhatsApp. It will take time, but Facebook should be able to successfully monetize commerce-related services.

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.

Today's 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 is possible that Facebook will unveil a name change.

Meanwhile, Facebook still faces intense antitrust and regulatory scrutiny. If lawmakers pass legislation that forces it to change its algorithm to a less engaging chronological feed — one option that has been floated — it would seriously crimp its business model. But given Congress's track record, the likelihood of serious reform enacted in a timely manner is low.

That 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 refiled 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 of dollars more on moderators or faces some behavioral remedies from the FTC, 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 its sales at double-digit rates over the next two years. If accurate, it makes the current valuation attractive compared with big technology peers. Apple, for example, is valued at 26 times fiscal 2022 earnings, yet is only expected to grow its revenue by 3% next year.

So, for investors, it's hard to argue that they should abandon Facebook right now.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tae Kim is a Bloomberg Opinion columnist covering technology. He previously covered technology for Barron's, following an earlier career as an equity analyst.

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