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Facebook earnings to remain unscathed by scandals, but Apple may bite

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Facebook earnings to remain unscathed by scandals, but Apple may bite

The negative headlines plaguing Facebook Inc. this past month are unlikely to hamper the social media giant's third-quarter financial performance, analysts say.

Facebook has spent the past month dealing with the fallout from revelations exposed by former product manager Frances Haugen. Her leaked documents showed that Facebook knew its Instagram LLC harmed teen mental health and that its platform was being used by drug cartels and human traffickers.

While Facebook is facing increased regulatory risk in the wake of the scandal, Wall Street will remain focused on the company's core metrics, notably revenue and user growth.

"They're addictive products. They have a reach that advertisers want," said Gene Munster, a managing partner at venture capital firm Loup Ventures. Congress may weigh in on Facebook to make its platforms healthier for users, but it is not going to change Facebook's core business model, he added.

"While these controversies feel more personal, I don't think Facebook has really anything to worry about besides a big legal bill," Munster said in an interview.

Show me the money

The vast majority of Facebook's revenue is derived from advertising, which skyrocketed during the pandemic as more people tuned in online. In the second quarter, Facebook's quarterly revenue came to $29.08 billion, up 56% from $18.69 billion in the prior-year period. Advertising revenue was up 56% year over year to $28.58 billion, while other revenue rose 36% to $497 million, beating Wall Street expectations across the board. Facebook last quarter also notched a new record of some 2.9 billion monthly active users.

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Analysts will also continue monitoring whether Apple Inc.'s Identifier for Advertisers, or IDFA, policy change impacts Facebook's ad revenues. The consumer electronics giant's iOS 14 update that rolled out in April requires apps to seek users' permission to collect and share user data, a move widely expected to impact targeted mobile advertising.

"The IDFA stuff, in our view, has only gotten worse this quarter and it needs to be paid attention to even more than it was before," Ygal Arounian, managing director of internet equity research at Wedbush Securities, said in an interview. "That's the one piece that might be having the biggest impact on metrics."

Loup's Munster agreed. "I suspect they'll say their [ad revenue] numbers would have been better, if not for IDFA changes."

Beyond bread-and-butter metrics, analysts will also be watching for bits about Facebook's metaverse project announced last quarter by CEO Mark Zuckerberg. Reporting from The Verge the evening of Oct. 19 signaled that Facebook will be rebranding itself to align with its metaverse world, where users can socialize, shop and partake in other commonplace activities in a fully virtual setting. The official renaming announcement is rumored to occur at the company's Connect conference Oct. 28.

Regulatory risk

Still, investors cannot completely ignore the risk of regulation, Daniel Hanley, a senior legal analyst at pro-competitive Open Markets Institute, told S&P Global Market Intelligence in an email.

"I can see some Congressional action being taken within the next year," Hanley said, later adding that such action may be as large as a divestiture of Facebook's assets, including Instagram and messaging app WhatsApp Inc.

The Federal Trade Commission previously filed a lawsuit against Facebook seeking the divestiture of those two assets. The company was also charged by the U.S. government on Oct. 19 for illegal preferment of job openings to immigrant workers. Additionally, Facebook on Oct. 18 signaled that more damaging headlines are on the way.