In its second quarter reports, no measure is more essential for evaluating the health of Facebook’s business than its advertising revenues.
The iOS 14.5 update allows iPhone and iPad users to restrict companies from tracking their device’s activity. This makes it difficult for companies such as Facebook to target users with personalized advertisements.
No company expressed more concern about the impact of iOS 14.5 than Facebook, which warned that the change in Apple software would have an impact on small businesses’ ability to market to their customers. For a long time, Facebook has warned investors to expect “ad targeting headwinds” as a result of Apple’s changes, as well as others in the internet landscape.
The social media behemoth is set to report earnings after the close of business on Wednesday.
Facebook’s revenue for the second quarter, guidance for the rest of the year, and any comments made by the company’s executives during the earnings call will all be telling. This quarter’s results could reveal how many users chose to limit Facebook’s tracking and whether the social media company was able to work around those restrictions.
“The changes went into effect during the quarter, and the 14.5 update is still being rolled out,” said Debra Aho Williamson, principal analyst at eMarketer. “I’m going to be very interested.”
Facebook’s competitors have already navigated the challenges of iOS 14.5 with few setbacks. Snap, for example, was unaffected by the Apple update as much as it had anticipated, telling analysts on Thursday’s earnings call that it had observed “higher opt-in rates than we are seeing reported generally across the industry.” Twitter echoed the sentiment, informing shareholders that the impact of Apple’s changes had been less than anticipated. Both companies cautioned that the long-term effects of iOS 14.5 are unknown, but the early results have been promising.
Here are three Facebook storylines to keep an eye on when the company releases its second-quarter earnings:
- Facebook’s commerce division
To combat the restrictions imposed by Apple’s iOS 14.5 update, Facebook has increased its efforts to bring more commerce directly into its own apps.
It did this last year by introducing Facebook Shops and Instagram Shops, and the company recently announced plans to expand ways for creators to promote shoppable products through their Instagram accounts. Furthermore, in June, Facebook announced plans to add shops to its WhatsApp messaging service.
Facebook is able to directly measure the effectiveness of its ads and provide those statistics to advertisers by having users make purchases from advertisers directly on its own apps.
Already, Facebook claims that its apps have over 300 million monthly Shops visitors and 1.2 million monthly active Shops. Investors will be interested in any updates from Facebook regarding its commerce efforts.
“While the second quarter is not traditionally a big commerce quarter, social commerce is clearly coming into its own,”
- The influence of Covid on app usage
Investors will want to know if the economic reopening and the expansion of Covid-19 vaccines have had an impact on the amount of time users spend on Facebook and its various apps.
When people around the world were forced to stay indoors a year ago, Facebook and other consumer apps saw an increase in usage as people sought to stay connected. Now, investors will want to know if that usage has dropped or if it will continue to rise.
“Are people posting more now that they are out and about, or are they living in the real world?” What are they up to?” Kim Forrest, Bokeh Capital’s chief investment officer, stated
The growing spread of the coronavirus delta variant, on the other hand, adds a twist to this. As cases resume in the United States, investors will want to know what impact, if any, the delta variant may have on Facebook usage.
- The regulatory landscape
Since the March 2018 Cambridge Analytica scandal, in which it was revealed that a political consulting firm improperly accessed the data of 87 million Facebook profiles in order to influence the 2016 presidential election, Facebook has been scrutinized by lawmakers and regulators around the world.
This quarter brought some significant news regarding all of that regulatory pressure.
Most notably, in late June, a federal court dismissed an antitrust complaint filed by the Federal Trade Commission against Facebook, as well as a parallel case filed by 48 state attorneys general. Those battles aren’t over yet, but they’ve taken some of the sting out of Facebook.
Furthermore, in July, the Biden administration chastised the social media company for not doing enough to combat misinformation about its services, which discourages people from taking Covid vaccines. In response to the misinformation on Facebook, President Joe Biden stated, at one point, that “they’re killing people.”
Investors would benefit from hearing directly from Facebook’s executives about their outlook on regulatory pressure in the aftermath of these two developments.
“Getting out from under the FTC investigation is a big weight off Facebook’s back for the time being, but the regulatory environment isn’t going away anytime soon,”
Looking back in time
The company has consistently outperformed earnings-per-share projections in its second-quarter report.
Furthermore, the stock rises approximately 2.7 percent on average in the session following an earnings report, but only 1.4 percent on average after second-quarter results.
However, Facebook’s strong track record of earnings beats and solid average stock gains does not guarantee that the company’s stock price will always rise. According to Bespoke, Facebook’s stock has moved higher after earnings 58 percent of the time overall and 56 percent of the time after the second-quarter report.
According to Bespoke, the second quarter has also produced more volatile moves than other earnings reports. In recent years, Facebook’s stock has gained more than 8% after reporting its 2020 second-quarter results and dropped nearly 19% after reporting its 2018 second-quarter results for the same period.
Facebook’s stock has risen more than 36% so far this year, and it was up more than 1% Wednesday morning. On Wednesday, the social media giant’s stock price reached a new high of $377.55.