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The Ratings Game: Facebook offers ‘a needed dose of pain relief’ in the face of Apple privacy challenges

Facebook Inc. is navigating a changing advertising landscape and its own brand-related headaches, but analysts say the company’s preparedness—and large wallet—can help it fare better than others.

Facebook
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-5.14%

and its social-media peers are in the midst of dealing with privacy-related changes at Apple Inc.
AAPL,
+0.58%

that make it easier for consumers to opt out of ad targeting and harder for marketers to gauge the effectiveness of their campaigns. Facebook and Snap Inc.
SNAP,
+2.73%

both provided weaker-than-expected forecasts, blaming these challenges, but investors seem to think that Facebook has a better grip on the situation.

Shares of Facebook are off 4% in Tuesday afternoon trading, whereas Snap shares suffered a record decline of 27% the day after its earnings report last week.

“After last week’s bomb from Snap and many other ominous dark-clouds on the horizon, Facebook’s 3Q 2021 revenue performance and 4Q 2021 guide should provide a needed dose of pain relief to the equity markets,” MoffettNathanson analyst Michael Nathanson wrote in a note titled “R E L A X.”

The high end of Facebook’s fourth-quarter revenue forecast came in about $2 billion below Nathanson’s estimate, but he said that heading into the report, there was a “growing fear” that Facebook was set to deliver a far worse outlook.

“We understand the angst, but it is hard to ignore the fact that the company should exit 2021 with an overall revenue growth rate, headwinds included, of around +20%,” he wrote. Taking into account new disclosures about the performance of Facebook’s virtual-reality business, Nathanson said that the price-to-earnings multiple for the core Facebook business is now “an extremely cheap target multiple of 23.5x.”

He kept a buy rating and $420 price target on the stock.

Opinion: Dear Facebook: No one cares about Oculus; give us Instagram revenue!

Bernstein analyst Mark Shmulik deemed the latest earnings report perhaps the most important one in Facebook’s history, and he said that the company “did just enough to keep bears at bay.”

In his view, the company struck a more confident tone relative to Snap when discussing the impact of Apple’s changes to how it treats the IDFA, or identifier for advertisers. Many analysts now feel that Snap had been too dismissive of the changes three months back, only to have been overwhelmed with the latest report, but Facebook demonstrated that it had been planning for changes for some time.

“While Snap may have been blindsided by Apple’s IDFA impact, FB has been diligently working for over a year to adapt to privacy-related changes and Zuckerberg went so far as to kick off the call by stating ‘the bottom line is we expect we’ll be able to navigate the headwinds over time with investments that we’re already making today,’” Shmulik wrote. “Powerful commentary.”

He maintained an outperform rating on the stock but cut his price target to $400 from $425.

The Apple-related challenges are “transitory, not structural,” wrote Truist Securities analyst Youssef Squali, who also kept a buy rating on Facebook shares but lowered his target to $400 from $425. He sees Facebook as “better positioned” on a relative basis to deal with the changes given its vast user base and the fact that the company is “not shy about leveraging its fortress balance sheet with $58 billion to invest in talent and technology to solve these issues.”

Wedbush analyst Ygal Arounian took a more mixed view of the stock. While he agreed that Facebook appears to have been more “forthcoming” and prepared than some of its peers when it came to the Apple changes, he also argued that investors may be overlooking Facebook’s expense outlook for 2022. At the midpoint, the company expects 32% expense growth, which would make for growth that’s twice as fast as what Arounian models for revenue.

“What is critical here in our view is that much of this expense growth is coming from the Metaverse investments, which are unlikely to drive revenue for years to come (Facebook expects to spend $10 billion in 2021, and will likely grow materially next year),” he wrote.

Arounian has a neutral rating on Facebook shares and cut his price target to $325 from $355.

Shares of Facebook have lost 15.5% over the past three months as the S&P 500
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+0.19%

has risen 3.6%.

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