Facebook (FB) is set to report fourth-quarter 2020 results on Jan 27.
Facebook is expected to wrap up an already strong year by reporting another solid quarter of growth on Wednesday, despite a pandemic, a deluge of election misinformation, and the specter of increased regulation.
The company will report $26.4 billion in fourth-quarter revenue, up 25.3% year over year, according to analysts. The growth can partly be credited to the pandemic, which kept many people at home and more active on social media, and to Facebook’s addition of more e-commerce tools like online stores that businesses can set up on Facebook and Instagram.
“Facebook has rolled out new features and functionality at a time when e-commerce has shot up, so it should be a pretty good fourth quarter,” said Justin Post, an analyst at Bank of America.
Many businesses shifted more of their marketing to digital ads during the pandemic, so analysts expect to see big gains in Facebook’s ad sales during the holiday season, the busiest shopping season of the year.
“The COVID closings actually helped Facebook—there was a lot more engagement on the platform,” said Hari Srinivasan, an analyst at investment management firm Neuberger Berman.
The company expects ad-revenue growth on a year-over-year basis to be more than the third quarter’s growth rate, driven by continued strong advertiser demand during the holiday season. Strong demand for Oculus 2 is expected to boost other revenues.
Notably, the Zacks Consensus Estimate for revenues is pegged at $26.29 billion, indicating an increase of 24.7% from the year-ago quarter’s reported figure.
Additionally, the consensus mark for fourth-quarter earnings is pegged at $3.21 per share, having been revised 0.3% upward in the past 30 days, indicating 25.4% growth from the figure reported in the year-ago quarter.
Let us see how things are shaping up for the upcoming announcement.
Digital Shift to Boost Y/Y Ad Sales:
Facebook witnessed a jump in the usage of its services like Messenger, Instagram, and WhatsApp in the third quarter amid coronavirus-induced lockdowns and shelter-in-home guidelines. The momentum is expected to have continued in the to-be-reported quarter.
The Zacks Consensus Estimate for fourth quarter MAUs worldwide is pegged at 2.776 billion, suggesting 11.1% growth from the figure reported in the year-ago quarter. Moreover, DAUs worldwide is pegged at 1.840 billion, indicating 11% growth from the figure reported in the year-ago quarter.
Moreover, an improved ad-spending environment, as well as accelerated digital shift, is expected to have driven Facebook’s ad revenues in the to-be-reported quarter. The company’s top-line growth is likely to reflect improving market share gain, driven by a growing user base and continuing innovation in ad products.
Further, Facebook is expected to have benefited from the coronavirus-induced accelerated shift in consumer demand for e-commerce services as the platform added several small and medium businesses (SMBs) in the to-be-reported quarter.
The company’s initiatives to build tools and functionalities for SMBs, which are helping them to provide e-commerce services to users, is expected to have driven Facebook’s growth in the fourth quarter.
But beyond dollars and cents, Facebook continues to struggle with policing content on its service while facing a crackdown by regulators for alleged antitrust violations and for moderation policies that make both Republicans and Democrat legislators unhappy.
Here are three things to watch for in Facebook’s fourth-quarter earnings:
Apple ad acrimony –
Facebook is bracing for changes by Apple that will make it harder for the social network to track users for ad-targeting purposes. The update will limit the amount of data that Facebook can provide its advertisers, which Facebook argues will reduce revenue for those advertisers, in addition to Facebook’s revenue. Facebook has criticized Apple’s decision to implement the changes, ostensibly done for increased user privacy, claiming it will adversely harm small businesses.
Amid the opposition, Apple delayed the ad-tracking change from fall to “early” 2021, to give developers more time to adjust.
Regulatory rumble –
Facebook is under the regulatory microscope over its aggressive business tactics. But lawmakers are also increasingly calling for a review of Section 230, the federal law that protects Internet services from being held liable for what their users post.
The fight over Section 230 has gained more momentum following the Jan. 6 Capitol riots, which many critics say were fueled by former President Trump’s inflammatory comments on social media, and by Trump’s subsequent ban from Facebook and Twitter.
Working in Facebook’s favor, however, is that Section 230 is complicated and any changes to it would likely take a long time to implement, analysts agreed.
Conservative exodus –
Before and after the recent election, Facebook added new rules for what could be posted on its service and increased its enforcement. As a result, many conservatives claimed the company was censoring their views and unfairly banning Trump and his supporters.
As a remedy, some users said they would leave Facebook for Trump-friendly rivals like Parler, MeWe, and Gab. In fact, the three services did experience a growth spurt. But did it come at Facebook’s expense?
Based on recent third-party data and what happened following previous user unrest on Facebook, analysts don’t expect much impact on Facebook’s user numbers. “There’s definitely some risk of pushback from users who see what social media companies are restricting,” Post said. “But we … have not seen a big falloff.”
However, changes made by Apple AAPL and Alphabet’s Google in their mobile operating systems and browser platforms have limited Facebook’s ability to track the user-activity trends. Moreover, intensifying competition from Google, Snap, and Twitter for ad-dollars remains a headwind.
These factors are expected to have affected the year-over-year advertising-revenue growth rate in fourth-quarter 2020.
Nonetheless, the company’s solid user base in the Asia Pacific region and growth in Instagram Stories and Feed are expected to reflect on the top line.
The consensus mark for this Zacks Rank #2 (Buy) company’s fourth-quarter advertising revenues is pegged at $25.77 billion, indicating a 24.3% growth from the figure reported in the year-ago quarter.
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