Facebook Q3 Earnings Preview: Ad Growth Threatened By New Apple Privacy Rules

Judging by the current mood in markets regarding social media stocks, Facebook (NASDAQ:FB) will likely have a tough time satisfying investor expectations when it reports third quarter earnings after today's Wall Street close.

FB Weekly TTM

Since Apple's (NASDAQ:AAPL) overhaul of its privacy settings earlier this year—which allows iPhone users to opt out of receiving targeted advertising—evidence is mounting that the change is hurting ad sales across all social media platforms. Snap (NYSE:SNAP) shares plunged close to 30% on Friday after the owner of the Snapchat app warned that the iPhone maker’s data collection policies have made it difficult for advertisers to test and measure their campaigns.

The Menlo Park, California-based Facebook itself struck a cautious tone in July, saying its sales growth could stall as Apple's new rules impede the data collection on mobile devices even as the pandemic-fueled boom in its ad business slows.

Apple’s new policy has created big uncertainty for the digital ad market since it was unveiled. The policy, implemented in April, requires apps to ask users whether they want to be tracked, which has made it harder for advertisers to direct their ads at the appropriate audience and receive information regarding how well their ads performed.

It seems U.S. users opt into tracking only about 16% of the time when they encounter the Apple privacy prompt, according to mobile-app-analytics provider Flurry, cited by the Wall Street Journal. 

In addition to headwinds related to Apple’s privacy settings, Facebook and other social media companies are also seeing their growth hurt by supply-chain disruptions globally. Snap said last week that small and medium-sized businesses are cutting their ad spending as their growth stalls due to logistics issues. 

Slowing Sales

Whether Facebook will report a slowdown in growth similar to what Snap reported isn't certain, but it’s almost impossible for the social media behemoth to repeat the performance of the past few quarters when businesses ramped up their ad spending to lure locked-down customers opting to shop online during the pandemic. 

Facebook has generated more than $54 billion in revenue from advertising in the first six months of 2021, up from roughly $36 billion in revenue during the same period last year. For the period that ended on Sept. 30, analysts are expecting sales growth of just 2% when compared with the previous quarter.

These headwinds have hit Facebook stock hard over the past three months. FB shares are down more than 12% versus the flat performance of the NASDAQ 100 Index. 

But if history offers any clue, then FB stock could be up for a comeback after this dip. Its shares have rebounded strongly after every major crisis the company has endured over the past few years. The reason is simple: businesses can’t afford to ignore the FB platform due to the company’s massive global reach. By the end of the second quarter, Facebook had 1.91 billion daily active users for its flagship social network. 

Bottom Line

FB earnings could come under pressure, mainly due to Apple’s new privacy settings. But any weakness could be an opportunity for buy-and-hold investors.