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Versus consensus revenue came in 2% below at $29bn mostly driven by higher-than-expected impact from iOS 14.5 update which we believe was mostly on account of street not having updated their numbers post the Snap (NYSE:SNAP) results.
Revenue came in 5% above our estimates for Facebook (NASDAQ: FB) primarily driven by higher-than-expected Impressions per MAU increasing 2.8% vs our -5% estimate. This more than offset, reported price increase of 22% which came in below our estimate of 25% (and 47% in Q2 2021) as we believe iOS 14.5 and 15 upgrades took a toll as reduced demand for ads trimmed pricing growth.
Much as we called out in our preview to the Q3 results, management called out three headwinds for lower-than-expected revenue growth…
Q4 revenue and expense guidance is comfortably ahead of our estimates which lends us to believe that Facebook is impacted to a lesser degree than SNAP, given its scale which advertisers prioritise over smaller social media platforms. Additionally, we believe relative to SNAP, Facebook has access to additional data on users given its multiple platforms such as IG and WhatsApp, enabling it to increase both efficiency of ads by increasing its accuracy and targeting.
1. Reduced ads accuracy:
Facebook has seen a measurable decline in the accuracy of its ad measurements where it witnessed under-reporting IOS web conversions. In reality conversions like sales and app installs are much higher than what’s being reported from iOS devices for many advertisers and Facebook continues to improve its ads measurement through the launch of its conversion API. Facebook believe that will be able to address more than half of the under-reporting by the end of 2021 and will continue to work on improving in 2022.
2. Declining ads targeting capabilities:
The decreased accuracy of Facebook’s ads targeting has reduced ROI for advertisers. It has launched conversions API and Aggregated Events Measurement to improve ROI for advertisers (for more detail – Link here).
3. Increased investments in improving ads measurement and targeting:
The third detrimental impact from the privacy updates of iOS on Facebook will see it increase investment in improving the efficiency of its ad advertising and measurement tools. Based on our analysis Facebook has set aside an additional $5bn to $8bn in 2022 (4 to 7% of 2022E Revenue) to improve its Ad Measurement and Targeting capabilities it has lost through the iOS update.
After benefitting from the pandemic where e-commerce received a significant boost from customers staying at home and ordering goods, re-opening of the economy is already seeing commerce shift back to brick-and-mortar format. Whilst businesses are still making the shift to online, the re-opening of economy will see online sales decelerating at much lower rate than at the height of the pandemic. This according to Facebook has reduced appetite for increased advertising spend for customers.
We see 2022E expense guidance of 29% to 38% YoY growth as disconcerting given it translates to lower operating margins in 2022 to 33% to 37% from 40% in 2021 and EPS deceleration to 9.2% vs our previous 13% estimates. Higher expenses are primarily driven by ….
Despite, lower 2022 guidance, valuation remains attractive as Facebook currently trades on 22x NTM PE ratio (Figure 2) which is in the mid range of its pre-pandemic levels.
Given lower than expected iOS impact we raise our fair value NTM PE to 22x for Facebook, conferring a 28% upside (12-month target price) to its current share price (Figure 3). We reiterate our “Buy” rating on Facebook.
Facebook’s revenue miss vs consensus was only 2% but EPS beat of 1% has reassured investors that revenue headwind from iOS updates is currently being well managed by Facebook. However, higher than expected expenses growth of c.29 to 38% in 2022 has dented some investor confidence as revenue growth not being in the same region according to management translates to lower margins by 3 to 7%. We expect shares to remain volatile around political news surrounding the stock and as the impact of the iOS 15. Shares are trading at 22x NTM PE and on a 12-month target price we see a 28% upside to current price anchored on our 2023 EPS estimate of $18.3. We reiterate “Buy” on Facebook.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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