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Is Facebook Stock a Buy? | The Motley Fool

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The social media company remains a polarizing investment.

Key Points

  • Apple’s iOS update is throttling the growth of Facebook’s ad business.
  • But Facebook’s family of apps continue to gain new users.
  • The stock still looks undervalued relative to its growth potential.

Facebook (NASDAQ:FB) posted its third-quarter earnings on Oct. 25. The social media giant’s revenue rose 35% year-over-year to $29.01 billion, but still missed estimates by $510 million. Its earnings increased 19% to $3.22 to per share, which beat expectations by a nickel.

Facebook’s stock rose slightly after the report, and remains up about 20% for the year. The market’s calm reaction to Facebook’s revenue miss was starkly different from Snap‘s (NYSE:SNAP) post-earnings crash on Oct. 22.

Facebook CEO Mark Zuckerberg.

Image source: Facebook.

Let’s see why Facebook held onto its gains after its mixed earnings report, how the company plans to address its biggest challenges and controversies, and if its stock is still worth buying as a long-term investment.

Stable growth amid platform challenges

Last quarter, Facebook warned that Apple‘s (NASDAQ:AAPL) iOS update, which allowed users to opt out of data tracking features across all apps, could throttle its ad revenue growth in the second half of the year. But despite those challenges, Facebook still grew its ad revenue 33% year-over-year on top of the segment’s 22% growth a year earlier.

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During the conference call, chief operating officer Sheryl Sandberg called Apple’s iOS update the “biggest” headwind it faced in the third quarter, while CEO Mark Zuckerberg called out “intense” competition from Apple’s iMessage and ByteDance‘s TikTok as other emerging challenges.

Meanwhile, Facebook’s “others” revenue soared 195% as it sold more Oculus Quest headsets and Portal smart screens. This business accounted for less than 3% of Facebook’s revenue during the quarter, but its growth still boosted its total revenue growth by about two percentage points.

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Facebook expects its revenue to rise 12% to 21% year-over-year in the fourth quarter, which would represent its slowest growth in more than a year:

Growth (YOY)

Q3 2020

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Q4 2020

Q1 2021

Q2 2021

Q3 2021

Revenue

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22%

22%

48%

56%

35%

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EPS

28%

57%

93%

101%

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19%

Source: Facebook. YOY = Year-over-year.

CFO Dave Wehner blames that slowdown on the “significant uncertainty we face in the fourth quarter in light of continued headwinds from Apple’s iOS 14 changes and macroeconomic- and COVID-related factors.”

Wehner also expects the “others” segment to face a tough year-over-year comparison to the launch of the Quest 2 headset at the end of 2020.

But Facebook continues to connect people

Facebook’s near-term advertising growth could be bumpy, but it’s still continuously gaining more users. In the third quarter, its monthly active people (MAP) across Facebook, Messenger, Instagram, and WhatsApp increased 12% year-over-year to 3.58 billion — or nearly half of the world’s population — as its family average revenue per person (ARRP) grew 21% to $8.18.

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Those growth rates held steady over the past year, even as Facebook grappled with a whistleblower crisis, a streak of negative headlines, and regulatory threats to break up the company.

Growth (YOY)

Q3 2020

Q4 2020

Q1 2021

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Q2 2021

Q3 2021

MAP

14%

14%

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15%

12%

12%

Family ARRP

7%

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17%

29%

37%

21%

Source: Facebook. YOY = Year-over-year.

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During the call, Zuckerberg called the whistleblower reports a “coordinated effort to selectively use leaked documents to paint a false picture of our company,” and stated that “polarization started rising in the U.S. before I was born.”

Zuckerberg said Facebook would continue to ramp up its investments in safety and security to protect its users, but noted that it couldn’t fix the underlying polarization “by itself” if social media wasn’t the root cause of those issues.

An emphasis on the metaverse and bigger buybacks

Instead of focusing too heavily on the ad business’ temporary headwinds and controversies, Facebook emphasized the expansion of its metaverse business with new VR headsets, experiences, and upcoming AR devices.

Starting in the fourth quarter, Facebook will start breaking out the financials for its “Facebook Reality Lab”, which includes its VR and AR products, to give investors a clearer view of its growth potential beyond targeted ads.

Facebook also announced a $50 billion increase to its stock buyback plan, which still had $8 billion remaining at the end of September. However, a lot of those buybacks will likely be spent on offsetting its dilution from stock bonuses instead of boosting its earnings per share (EPS). For example, Facebook bought back $24.5 billion in shares in the first nine months of 2021, but its share count only dipped 0.2% year-over-year on a diluted basis.

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Is Facebook’s stock worth buying?

Facebook is growing a lot slower than Snap, and it faces many of the same headwinds. However, Facebook’s stock didn’t crash after its earnings report because it was already trading at much lower valuations than Snap.

Earlier this year, Snap had conditioned investors to expect a minimal impact from Apple’s iOS update, with a rosy long-term guidance of 50% annual revenue growth over the next few years. Those expectations caused its stock to trade at over 30 times this year’s sales before its revenue miss, and soft revenue guidance for the fourth quarter torpedoed its stock.

Meanwhile, Facebook still looks reasonably valued at 21 times forward earnings and less than eight times this year’s sales. Therefore, Facebook’s downside potential should be limited at these levels — and it could climb much higher if it weathers the near-term platform and regulatory headwinds.

 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Leo Sun owns shares of Apple and Snap Inc. The Motley Fool owns shares of and recommends Apple and Facebook. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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Updating Special Ad Audiences for housing, employment, and credit advertisers

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On June 21, 2022 we announced an important settlement with the US Department of Housing and Urban Development (HUD) that will change the way we deliver housing ads to people residing in the US. Specifically, we are building into our ads system a method designed to make sure the audience that ends up seeing a housing ad more closely reflects the eligible targeted audience for that ad.

As part of this agreement, we will also be sunsetting Special Ad Audiences, a tool that lets advertisers expand their audiences for ad sets related to housing. We are choosing to sunset this for employment and credit ads as well. In 2019, in addition to eliminating certain targeting options for housing, employment and credit ads, we introduced Special Ad Audiences as an alternative to Lookalike Audiences. But the field of fairness in machine learning is a dynamic and evolving one, and Special Ad Audiences was an early way to address concerns. Now, our focus will move to new approaches to improve fairness, including the method previously announced.

What’s happening: We’re removing the ability to create Special Ad Audiences via Ads Manager beginning on August 25, 2022.

Beginning October 12th, 2022, we will pause any remaining ad sets that contain Special Ad Audiences. These ad sets may be restarted once advertisers have removed any and all Special Ad Audiences from those ad sets. We are providing a two month window between preventing new Special Ad Audiences and pausing existing Special Ad Audiences to enable advertisers the time to adjust budgets and strategies as needed.

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For more details, please visit our Newsroom post.

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Impact to Advertisers using Marketing API on September 13, 2022

For advertisers and partners using the API listed below, the blocking of new Special Ad Audience creation will present a breaking change on all versions. Beginning August 15, 2022, developers can start to implement the code changes, and will have until September 13, 2022, when the non-versioning change occurs and prior values are deprecated. Refer below to the list of impacted endpoints related to this deprecation:

For reading audience:

  • endpoint gr:get:AdAccount/customaudiences
  • field operation_status

For adset creation:

  • endpoint gr:post:AdAccount/adsets
  • field subtype

For adset editing:

  • endpoint gr:post:AdCampaign
  • field subtype

For custom audience creation:

  • endpoint gr:post:AdAccount/customaudiences
  • field subtype

For custom audience editing:

  • endpoint gr:post:CustomAudience

Please refer to the developer documentation for further details to support code implementation.

First seen at developers.facebook.com

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Introducing an Update to the Data Protection Assessment

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Over the coming year, some apps with access to certain types of user data on our platforms will be required to complete the annual Data Protection Assessment. We have made a number of improvements to this process since our launch last year, when we introduced our first iteration of the assessment.

The updated Data Protection Assessment will include a new developer experience that is enhanced through streamlined communications, direct support, and clear status updates. Today, we’re sharing what you can expect from these new updates and how you can best prepare for completing this important privacy requirement if your app is within scope.

If your app is in scope for the Data Protection Assessment, and you’re an app admin, you’ll receive an email and a message in your app’s Alert Inbox when it’s time to complete the annual assessment. You and your team of experts will then have 60 calendar days to complete the assessment. We’ve built a new platform that enhances the user experience of completing the Data Protection Assessment. These updates to the platform are based on learnings over the past year from our partnership with the developer community. When completing the assessment, you can expect:

  • Streamlined communication: All communications and required actions will be through the My Apps page. You’ll be notified of pending communications requiring your response via your Alerts Inbox, email, and notifications in the My Apps page.

    Note: Other programs may still communicate with you through the App Contact Email.

  • Available support: Ability to engage with Meta teams via the Support tool to seek clarification on the questions within the Data Protection Assessment prior to submission and help with any requests for more info, or to resolve violations.

    Note: To access this feature, you will need to add the app and app admins to your Business Manager. Please refer to those links for step-by-step guides.

  • Clear status updates: Easy to understand status and timeline indicators throughout the process in the App Dashboard, App Settings, and My Apps page.
  • Straightforward reviewer follow-ups: Streamlined experience for any follow-ups from our reviewers, all via developers.facebook.com.

We’ve included a brief video that provides a walkthrough of the experience you’ll have with the Data Protection Assessment:

Something Went Wrong

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We’re having trouble playing this video.

The Data Protection Assessment elevates the importance of data security and helps gain the trust of the billions of people who use our products and services around the world. That’s why we are committed to providing a seamless experience for our partners as you complete this important privacy requirement.

Here is what you can do now to prepare for the assessment:

  1. Make sure you are reachable: Update your developer or business account contact email and notification settings.
  2. Review the questions in the Data Protection Assessment and engage with your teams on how best to answer these questions. You may have to enlist the help of your legal and information security points of contact to answer some parts of the assessment.
  3. Review Meta Platform Terms and our Developer Policies.

We know that when people choose to share their data, we’re able to work with the developer community to safely deliver rich and relevant experiences that create value for people and businesses. It’s a privilege we share when people grant us access to their data, and it’s imperative that we protect that data in order to maintain and build upon their trust. This is why the Data Protection Assessment focuses on data use, data sharing and data security.

Data privacy is challenging and complex, and we’re dedicated to continuously improving the processes to safeguard user privacy on our platform. Thank you for partnering with us as we continue to build a safer, more sustainable platform.

First seen at developers.facebook.com

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Resources for Completing App Store Data Practice Questionnaires for Apps That Include the Facebook or Audience Network SDK

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Resources for Completing App Store Data Practice Questionnaires for Apps That Include the Facebook or Audience Network SDK

First seen at developers.facebook.com

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