Facebook (NASDAQ:FB) easily beat analysts' estimates when it reported third-quarter revenue and earnings per share, yet shares still fell sharply. Investors were probably concerned primarily with management's warnings about uncertainty in 2021.
Could Facebook's revenue growth rates take a big hit next year? In this segment from Fool Live's "The Wrap," recorded on Oct. 30, senior technology specialists Daniel Sparks and Danny Vena and "The Wrap" host Jason Hall take a closer look at what investors should make of the social network's third quarter and management's commentary on 2021.
Jason Hall: Here's another one, another tech stock that's having a terrible day. Facebook, ticker FB, it's down like 6% right now. Daniel, you want to tell us what's going on there?
Daniel Sparks: Yeah. Facebook. Again, same thing we're seeing in advertising: an acceleration in Q3 from 11% revenue growth to 22% growth. Management did indicate they expect a further acceleration in Q4, which I think was really intriguing given the uncertain environment right now. It just really goes to show this digital transformation that's happening. But what could be weighing on the stock today is some unease during the earnings call. I think some of the remarks from the CFO and the press release about 2021 -- about the future. What management is basically saying is going into next year, there's two primary concerns that could be headwinds on revenue growth. One of them sounds like maybe a tough comparison, and that would be because, as we're seeing here, this was a very strong quarter, Q4 might be even stronger. Management says this is because retailers are coming online and e-commerce has accelerated and when that happens, they're spending more money on digital advertising and more money that could convert directly into e-commerce. But as we go into next year, as we saw this huge boost to e-commerce and to digital advertising, Facebook is warning that there could be a tough comparison there. Then the other part of that was just uncertainty related to ad targeting. We've heard a lot about iOS 14, and some of the things that Apple (NASDAQ:AAPL) is doing to make tracking individuals a lot harder and keeping a unique identifier for someone when it comes to advertising. Facebook says that this is going to affect them in a big way, which makes sense because you can imagine how much time people spend on their Facebook apps.
Hall: Daniel, my understanding, and tell me if I'm wrong. Basically, it prevents Facebook from being able to cross, use cross-app traffic on other apps on your iOS device to target you with ads. Is that basically how it works?
Sparks: I'm actually not super sure on the technicalities of it. Danny, do you have any insight on exactly what Apple is doing to make tracking more difficult within ads, within apps?
Danny Vena: I don't from that standpoint, not from a technical standpoint. I would point out that there are probably, what is it? A billion active Apple devices out there in the wild, or very near that. The fact that all of a sudden there are a billion fewer people that you are going to be able to track and feed those ads to based on the technology they have today. I think that makes sense of what you just said regarding how that's going to hit Facebook's potential revenue growth next year.
Sparks: Yeah, and then the other part of the uncertainty, I think that it wasn't necessarily said, but obviously there's a lot of scrutiny over Facebook and their ad targeting. What makes Facebook different from a platform like Twitter or Pinterest is Twitter and Pinterest are based on public information. So even though they might seem to be scrutinized sometimes in a way Facebook is, they have a very good argument as the way they are tracking individuals because it's based on public information that people are sharing publicly. So Facebook treads a very careful line with most of us who are using Facebook in private ways for a limited group of people, so I think that Facebook is just seeing a lot of scrutiny there, and I think there's uncertainty and just ad targeting in general, what that's going to look like next year. But I will say in general, Facebook is very conservative when they talk about the future. Extremely conservative, if we look back and see how they performed relative to the way the CFO talks, so they're not ones to hype things up. I'm not too concerned about 2021, but just something to keep an eye on.
Hall: Just a little bit of extra thoughts on Facebook when it comes to that ad-rev and being able to target users. I think this is really important. So you think about the value of Apple users is not just the number, the number is good, but it's also Apple users tend to spend more money. They tend to be higher income, and that makes a big difference. If you're a marketer, you want to have your ads in front of as many people that are actually going to spend money as you possibly can. So that's a big advantage, I think, that gets overlooked versus Android devices. I think this could potentially affect Facebook in a larger way because Apple is really giving back its users. Apple has prioritized privacy. Look at their ads, I mean, they're doing so much to really prioritize privacy and security of data, and I think that could be to the negative to the detriment of Facebook. But I don't think it's a net detriment because I think advertisers are still going to go to Facebook because of that billion regular daily users and a number that's growing and growing, and because of the fact that the marketers are going to continue to send money to Facebook, because even if they can't be targeted, if they had enough people that have Apple devices, they're going to win some business. That's how I think about it.