Facebook (Nasdaq: FB) reported a strong Q3 in which the company topped earnings estimates by a healthy margin. Initially, shares jumped higher, however, they gave back these gains in ensuing sessions as investors are concerned about a variety of issues including documents leaked by a whistleblower, Apple's privacy changes which make ad tracking more difficult, and the company's increased spending as it looks to transition to the 'metaverse'.
Inside the Numbers
In Q3, Facebook reported $3.22 in earnings per share, topping expectations of $3.19 per share. This was a 19% increase from last year's Q3 earnings which benefited from a jump in ad deliveries due to the pandemic. Revenue fell slightly short of expectations at $29 billion vs expectations of $29.6 billion. This was a 35% increase from last year.
Daily active users reached 1.93 billion which was in line with expectations. Monthly active users fell slightly short at 2.91 billion vs 2.93 billion. Like other social media stocks, average revenue per user fell short of expectations at $10.00 vs. $10.15. This was largely due to Apple's increased privacy safeguards which makes ad-tracking more difficult and undermines the effectiveness of Facebook's ads.
Facebook also announced that it was increasing share buybacks by $50 billion which led to the stock's early strength. During the conference call, management talked about how it sees Reels as the newest area that it wants to invest in to increase its appeal to a younger demographic who are spending less time on Facebook and Instagram compared to TikTok and YouTube (NASDAQ: GOOGL).
The company also defended itself against a whistleblower who leaked internal documents showing that teen growth has slowed, in addition to the company knowing that its product was having a negative effect on teens' and young adults' mental health.
The company also continues to position itself for a post-social media world with its investments in the 'metaverse'. It's significantly investing in this and also will report Facebook Reality Labs as its own segment which will focus on hardware, augmented reality, and virtual reality products. It sees CAPEX of at least $10 billion over the next 2 years.
Facebook is forecasting Q4 revenue between $31.5 billion and $34 billion which fell short of expectations of $34.8 billion. It attributed the lower guidance due to uncertainty about the ad environment and effects from Apple's iOS14 (NASDAQ: AAPL) changes.
Stock Price Outlook
The combination of earnings and revenue growth and a stock price that has dropped by nearly 20% has led to Facebook's valuation improving. Currently, it has a forward P/E of 19 which is slightly cheaper than the S&P 500 (NYSE: SPY) despite it having a faster growth rate and higher margins.
However, the company does face several headwinds such as its losing popularity among the 18 to 29 demo, the ads business losing steam, increased spending, and regulatory scrutiny. Despite these challenges, Facebook deserves the benefit of the doubt. Over the last decade in bull market environments, buying on 20% dips has worked out.