Facebook Q3 2021 Results - the key takeaways

Facebook (“FB”) reported Q3 results yesterday. Some thoughts on the numbers and the implications for the stock below. All thoughts and comments welcome. Also, as usual this is not investment advice.

1. FB’s results were, like Snap’s, mixed. Q3 revenues of $29.01bn were below S&P consensus of $29.5bn (as were advertising revenues - $28.27bn vs $29.02bn) while Monthly Active Users (MAUs) were also below at 2.91bn vs 2.98bn forecasts. It beat adjusted Earnings Per Share (“EPS”) estimates at $3.22 vs $3.17 but not as excessive a beat as Snap.
2. Guidance for Q4 was also below consensus expectations. Facebook guided to $31.5bn-34bn revenues, a range of 16%-21% Year on Year (“YoY”) growth (a slowdown vs the 35% revenue growth for Q3 and the 33% growth for Q4 2020). Even the top end of that guidance is below the $34.8bn analysts had forecast pre-results. Apple blamed both the wide range of guidance and the slowdown in revenue growth on the impact of both macroeconomic factors and, more importantly, Apple’s iOS changes (more on this below).
3. However, unlike Snap which fell nearly 27% off the back of its results, the reaction to Facebook’s numbers were far more muted: in fact, the shares rose slightly in after-hours trading. That may reflect weakness heading into numbers, particularly post-Snap’s results (the shares fell over 5%). It may also reflect that Facebook is a more mature company in terms of growth and so profitability was more an important consideration. Finally, there may also have been a relief that Q4 guidance was not worse and that Facebook’s comments on the call expressed confidence in the long-term future.
4. One general theme from the call was the emphasis on the long-term and this was across several different strategic areas, whether the building of the Metaverse, the moves to reignite Facebook’s standing amongst young adults or its attempts to circumvent Apple’s moves to help boost targeting of adverts. The call to investors was very much “back us for the ride” but that ride will be expensive and be long.
5. An example of this is what was said on costs. One noticeable feature of the results was just how much extra investment Facebook is going to be putting into the business. While 2021 operational expenditure (“opex”) and capital expenditure (“capex”) guidance was reduced (2020-1 opex guidance is now $70bn-71bn vs previous guidance of $70-73bn, and capex is now forecast to be $19bn vs $19bn-21bn previously), the big story is that 2022 will see a massive increase in costs. Guidance for 2022 opex is now $91-97bn, so up 30%-38% YoY, while capex is guided to be $29bn-34bn, up 52% to 79% YoY.
6. Put simply, that is a massive amount of extra investment into the business. Headcount will go up (the company said it will see significant acceleration from the 20% increase in 2021). There will extra investment in AI and machine learning, much of which will go towards providing workarounds to Apple’s iOS changes to provide advertisers with greater visibility. There will also be extra investment in other areas such as Reels. The company confirmed that 2022 operating margins will fall as revenue growth will not match the massive increase in costs.
7. However, the big level of extra investment will go into Facebook’s investments into the Metaverse. Facebook said it will spend $10bn on the Metaverse in 2021 and these costs will rise each year for the next several years. As a sign of its intent, Facebook will report its Metaverse business separately in a new divisional line, Facebook Reality Labs or “FRL”. One possible, medium-term question raised by the new reporting structure - the rest of Facebook’s ‘traditional’ businesses such as Facebook, WhatsApp and Instagram will be in the segment called Family of Apps – is whether Facebook is preparing the ground for a split of the two entities at such point.
8. It is clear this is a long-term project – Facebook stated the Metaverse will only start generating significant value in the later years of this decade, with the next several years being used to build its infrastructure. Margins for the whole group are likely to head downwards as revenue growth slows (see below). However, if Facebook gets this right, the potential upside is huge. Facebook stated it is targeting one billion people using the Metaverse by end of the decade supporting a hundreds of billions of dollars in digital commerce.
9. However, it was not just the Metaverse that was singled out as of strategic importance. Commerce is another big opportunity for Facebook and it made clear that one of the consequences of Apple’s advertising changes is that a lot more commerce is going to be shifted into individual apps. Expect the level of focus and investment into Marketplaces to increase as we head into 2022 and beyond.
10. A second area of focus is the young adults’ market. Facebook’s comments on their conference call, highlighting the growing competition coming from platforms such as Snapchat and TikTok (the latter being branded as one of the most effective competitors Facebook has seen), implied they see them as a growing threat to their business model, hence the emphasis on products such as Reels and expanding their video offerings generally. Going forwards, it made clear the emphasis will be on younger audiences and that it expects to see slower growth from older audiences as it rebalances its efforts together the former and away from the latter.
11. When it comes to revenue growth, Facebook still expects growth in both ad impressions and pricing (in Q3, advertising revenue growth was split 9% growth in ad impressions and a 22% increase in rates), but it would not quantify expected 2022 growth rates. It did say 2022 revenue growth would be lower than the cost growth (up 30%-38%) and, reading between the lines, meaningfully so.
12. The biggest headwind, as expected, was the impact of Apple’s changes. Facebook stated, if not for the changes, Facebook’s revenues would have grown Quarter on Quarter (QoQ). Given Facebook’s revenues in Q2 and Q3 were essentially the same at c. $29bn, that does not tell you much. However, the qualitative comments suggested the impact was significant, although the impact change should be more limited in Q4.?
13. Again, though, the issue is that the problems are likely to be quite long-lasting. While Facebook was confident it could mitigate the impact on measurement relatively quickly – although there is the question of Facebook marking its own homework – with c. 50% of the impact mitigated by the end of the year, with the rest in 2022, its’ measures to offset the targeting effects of Apple’s changes would be multi-year in nature. Interestingly, it also said it was working with other partners to solve, which is unusual for Facebook. So this issue is likely to impact revenue growth for some time to come.
14. What Facebook did not mention, unlike Snap, was the impact from further changes from Apple, with iOS15 and beyond. As I mentioned with Snap, the nightmare scenario is that Apple carries out a rolling programme of changes that continually forces the social media platforms to play catch up and which has a cumulative impact on advertisers’ desire to advertise on the platforms. Facebook has far greater scale than Snap, and first party data, and it is thus in a better position to ride through this. However, both Facebook’s and Snap’s comments highlight just how much Apple’s changes are impacting the online advertising ecosystem.
15. Like Snap, Facebook also pointed to macroeconomic headwinds, particularly slowing ecommerce growth and, to a lesser degree, issues in SE Asia around Covid restrictions. Like Snap, it blamed issues such as the supply chain problems and labour shortages. However, its comments were subtly different in that they seemed to emphasise more issues with e-commerce specifically than a general macroeconomic slowdown. Again, as pointed out with Snap, the comments on advertisers pulling ad spend is not being repeated by others, such as Agency groups, and one explanation is that it is SME advertisers who are being disproportionately impacted by the problems and / or pulling ad spending (SMEs do not tend to spend with Agencies and so the latter would not see the issue).
16. What does this mean for the shares? Facebook has scale and, unlike Snap, is probably viewed as “must have” by advertisers. That means it is still likely to be used and, while there may be questions whether Facebook’s solutions to its measurement and targeting issues really work, advertisers are likely to stick with the platform. The muted reaction by investors to what was both a massive hike in investment and both a growing competitive landscape and the impact of Apple’s changes, suggest that investors think the bulk of the effects are already priced into the shares. That may change as analysts change their numbers but that remains to be seen. In all likelihood, investors will continue to stick with the stock. ?

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