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Analysts monitor ad trends, regulatory headwinds ahead of Facebook's earnings

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Analysts monitor ad trends, regulatory headwinds ahead of Facebook's earnings

Analysts largely expect Facebook Inc. to post solid earnings on Oct. 29 despite ongoing regulatory headwinds and pandemic-fueled uncertainties.

Facebook's advertising business — which accounts for the bulk of its total revenue — declined earlier this year as businesses of all sizes cut costs amid the COVID-19 pandemic and some brands participated in a Facebook ad boycott to protest the company's content management policies. Facebook CEO Mark Zuckerberg is set to testify on Capitol Hill this week amid fresh criticism that his business has grown too large and potentially anti-competitive.

While analysts consider these challenges a near-term risk to Facebook's stock, they believe ad revenue stabilized in the third quarter, and the company will successfully navigate its regulatory hurdles long-term.

Advertising uptick

A September survey conducted by the Interactive Advertising Bureau noted signs of improvement for ad-based platforms following initial negative impacts earlier this year from the pandemic. Surveyed ad buyers predicted U.S. digital ad spend will grow 6% in 2020 compared to 2019. The September IAB survey included responses from 135 media planners, media buyers and brand executives about their U.S. ad spending plans for the remainder of this year and into the next.

Speaking on an earnings call, Facebook CFO David Wehner said for the first three weeks of July, the firm's year-over-year ad revenue growth rate was roughly in-line with its second-quarter growth rate of 10%. He forecast that the full third-quarter year-over-year ad revenue growth rate would be similar to Facebook's July performance.

Facebook reported advertising revenue of $18.32 billion for the second quarter ended in June, accounting for 98% of the company's revenue. That compared to $16.62 billion in ad revenue during the second quarter of 2019.

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Boycott impact

Several large advertisers including Verizon Communications Inc. and Coca-Cola Consolidated Inc. in June temporarily halted ad spend on Facebook and other social platforms as part of a broader campaign urging these companies to do more to reduce the spread of harmful content.

Despite the well-publicized ad boycott, Evercore ISI analyst Benjamin Black said his research indicates that by August there was a "material uptick" in spending from large brands across all media, including Facebook, which he expects to continue. The analyst in an Oct. 20 note upped his price target on Facebook's stock to $320 from $300 while increasing his 2021 EPS forecast to a Street high of $12.15, up from $11.36.

"While visibility is not perfect, we grow more bullish on our margin outlook for [Facebook in] 2021," Black wrote.

Regulatory scrutiny

Zuckerberg on Oct. 28 will join Twitter Inc. CEO Jack Dorsey and Google LLC CEO Sundar Pichai in virtual testimony before a congressional panel regarding the companies' content moderation practices amid increasing calls to modify U.S. law regarding a legal liability shield for online platforms with user-generated content.

Facebook has faced criticism from both Democratic and Republican lawmakers over the power it wields in the social networking space, including allegations that its acquisition of photo-sharing app Instagram LLC and messaging service WhatsApp Inc. has resulted in stifled competition and limited consumer choice.

A recent U.S. House antitrust report alleged Facebook holds a monopoly in the social networking market, and "competes more vigorously among its own products — Facebook, Instagram, WhatsApp, and Messenger — than with actual competitors." Zuckerberg at a July congressional hearing pushed back on such allegations, calling Facebook's Instagram purchase an "American success story" that helped Instagram widen its appeal in the mobile photo-sharing space.

Bob O'Donnell, president and chief analyst at TECHnalysis Research, said he would not be surprised if Facebook is eventually forced to divest its Instagram unit. But overall, O'Donnell expects any decisive regulatory action to take years.

"Anything that gets brought up will be fought tooth and nail for some time to come so maybe it's a while before it happens," O'Donnell said in an interview.