Interactive Investor

Why Facebook divides Wall Street  

26th October 2021 15:35

Graeme Evans from interactive investor

Bulls and bears are fighting it out following the social media giant’s mixed set of numbers.

A testing few weeks for Facebook (NASDAQ:FB) look set to continue after the social media platform warned it faces significant uncertainty from headwinds including recent changes to Apple (NASDAQ:AAPL) privacy settings.

The update to the iOS mobile operating system has dealt a blow across the social media sector as it prevents digital advertisers from tracking iPhone users without their consent.

Snapchat owner Snap lost more than a fifth of its value last week after highlighting the Apple change as one of the several significant headwinds, although the reaction to Facebook's downbeat fourth quarter guidance was more measured.

The Instagram and WhatsApp owner, which has 1.9 billion daily active users, offset the jitters by exceeding third-quarter profit forecasts with growth of 17% to $9.19 billion (£6.7 billion). It also gave a potential boost to future earnings per share by unveiling plans to repurchase another $50 billion (£36.3 billion) of stock.

Shares were 2% lower at $322 today and are down 9% over the past month amid a recent flurry of negative publicity over how it handles misleading or inappropriate content.

Co-founder and chief executive Mark Zuckerberg said yesterday that the claims presented by a whistleblower in leaked internal documents presented a false picture of the company.

His third-quarter comments also dealt with his long-term “metaverse” vision, where social media users interact through augmented and virtual reality hardware and software.

He said: “We made good progress this quarter and our community continues to grow. I'm excited about our roadmap, especially around creators, commerce, and helping to build the metaverse.”

Starting with the fourth-quarter results, Facebook plans to break out its Reality Labs into a separate reporting segment. Investment in the project is expected to reduce 2021 operating profit by $10 billion (£7.3 billion).

Chief financial officer added David Wehner added: “We are committed to bringing this long-term vision to life and we expect to increase our investments in the next several years.”

Looking to the fourth quarter, he forecast revenues in the range of $31.5 billion to $34 billion (£22.5 billion-£24.7 billion) due to the Apple headwinds and Covid factors. The figures compare with Wall Street forecasts for $34.8 billion (£25.3 billion) and comes after the third quarter failed to meet hopes.

UBS still has a “buy” recommendation and price target of $416, adding that investors will welcome the greater visibility provided by the Facebook Reality Labs disclosure.

The bank sees the quarter as largely about “clearing the decks” on the revenue and cost outlook for 2022 and expects Facebook to improve its management of Apple’s changes in iOS through better tools and systems, particularly when compared to competitors. 

The downbeat reaction to Facebook's earnings is in contrast to the wider performance on Wall Street, where the impact on growth from headwinds such as supply chain disruption and rising energy costs has been more modest than expected.

UBS noted that earnings growth so far has been just over 30% year-over-year and is on track for the third-fastest increase since 2010, according to FactSet data.

About 83% of companies have done better than expected, versus a five-year average of 76%, with the aggregate earnings surprise of 14% above the five-year average of 8.4%.

The S&P 500 closed last night at a record 4,566 but UBS's wealth management team said the solid earnings growth performance underpinned their continued expectations for levels of 4,800 in June and 5,000 in December 2022.

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