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  • Earnings
  • disruptive innovation

Will Q3 ad spend hamper the Facebook share price?

After a pandemic pause, advertising spending is expected to have grown in the three months to the end of September. Analysts are in general agreement that Facebook [FB] has been a main beneficiary of the ad spend renaissance. The company is expected to report a 38% increase in revenue and 18% growth in net profit when it announces its third quarter results on Monday.

“We believe Facebook will fundamentally benefit from improved ad spending and capitalise on accelerated digital transformation with new initiatives,” said Monness Crespi Hardt analyst Brian White, in a note published on October 6 and reported by Investor’s Business Daily.

The caveat was that the ongoing whistleblowing storm the social media network finds itself embroiled in means “we expect the stock to remain hostage” to the news in the short-term.

White added, “The negative news flow…could lead to another round of platform modifications, including dialing down engagement algorithms, and increasing spending on safety.” 

Facebook’s daily active user numbers are expected to have grown in the three months to the end of September. Analysts will be keen to hear how this has correlated to ad spending and how much of a headache Apple’s [AAPL] iOS updates have caused.

 

 

 

Headwinds converting ad to sales

Earlier this year, Apple introduced privacy changes in its iOS 14.5 software update, which created issues overnight for businesses advertising on Facebook and other social media platforms. The change has allowed iPhone users to opt out of apps tracking their web activity and thus preventing targeted advertising.

As a result of the ongoing privacy war between the two members of the FAANG class, Facebook is expecting people to spend less money. Despite the surge in ad spending after the pandemic pause, the company is worried that some companies will look elsewhere to advertise.

In a September blog post, Graham Mudd, Facebook's VP of product marketing, said the company has been underreporting iOS web conversions by around 15%.

“We believe that real world conversions, like sales and app installs, are higher than what is being reported for many advertisers,” wrote Mudd.

“We’re optimistic about our multi-year effort to develop new privacy-enhancing technologies that minimize the amount of personal information we process, while still allowing us to show personalised ads and measure their effectiveness,” Mudd continued.

However, Facebook is expecting headwinds from recent iOS updates “to have a greater impact in the third quarter compared to the second quarter.”

56%

Facebook's year-over-year revenue increase, the largest growth rate since 2016

 

 

Q2 2021 performance

For the three months to the end of June, Facebook comfortably beat analyst expectations, as reported by CNBC. Revenue came in at $29.08bn versus $27.89bn expected – this was a 56% year-over-year increase, the largest growth rate since 2016. Earnings per share were $3.61 versus $3.03 as expected by analysts.

Facebook reported that the average price of an ad increased by 47% in the second quarter, while there was a 6% increase in the number of ads it delivered.

On the earnings call at the end of July, Facebook warned it has forecast “year-over-year total revenue growth rates to decelerate significantly on a sequential basis as we lap periods of increasingly strong growth.”

$408.40

Facebook's consensus share price target

 

 

Q3 2021 expectations

Wall Street estimates align with the company’s revenue outlook. According to Zacks, a consensus of 11 analysts is for revenue to come in 37.65% higher year-over-year at $29.55bn.

Earnings per share are expected to be $3.20, which would represent an 18.08% increase on Q3 2020 EPS.

Despite the headwinds Facebook is currently weathering, the mood among analysts is bullish.

Jefferies analyst Brent Thill argued that Facebook is currently very cheap and at least 20% undervalued, reports Yahoo Finance. The stock closed on 20 October at $341.88, 11% down from its all-time high of $384.33 set on 1 September.

“Notably, our checks still point to robust Q3 ad spending with some advertisers reporting their Facebook spend coming in ahead of plan,” said Thill. 

“Notably, our checks still point to robust Q3 ad spending with some advertisers reporting their Facebook spend coming in ahead of plan” - Jefferies analyst Brent Thill

 

“Historically, Facebook has never grown revenue below 20% annually, with the company even managing 22% growth in FY20 during COVID-19," he pointed out.

Monness analyst White doesn’t appear overly concerned with the headwinds. In his 6 October report, he reiterated a ‘buy’ rating and a price target of $500, which implies an upside of 46.2% from the 21 October closing price.

According to MarketBeat data, Facebook has 2 strong buy ratings, 31 buy, six hold, and one sell. The consensus price target is $408.40.

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