Facebook Faces Its Moment of Truth

Facebook Faces Its Moment of Truth
Cheyne Gateley/VIP

Fourth-quarter financial results have been trickling in, but things kick into high gear when a handful of the world’s most valuable companies release their earnings this week. While all Big Tech’s earnings will be closely monitored, Facebook’s holiday quarter results will be a true test of its resilience in the face of stiff challenges. 

If there was ever a tough quarter for Facebook, it was Q4 of 2020. Things have been rough before, but last year was different when everything came to a head all at once — an ongoing global pandemic, an economic recession and one of the most important presidential elections in recent memory, all of which materially impacted Facebook one way or another.  

Facebook is two-faced (pun intended): There’s the consumer side, and then there’s the Wall Street side. In order to understand the company and its earnings, those fundamental truths must be acknowledged. Facebook’s user-engagement metrics and revenue generation will be the most critical components of its earnings report Wednesday afternoon. 

But which side of the face mattered more in Q4? Will pressure from the contentious presidential election, misinformation and censorship concerns and heightened regulatory scrutiny outweigh the likely strong advertising revenue and monetization of its other products?  

As disappointing as it may be for Facebook’s critics, the answer is probably not. The company’s closely watched user-engagement metrics might reflect slower growth because of the political noise in Q4, and Wall Street analysts anticipate Facebook’s Monthly Active Users (MAUs) stayed flat from Q3 at 2.7 billion.

However, its advertising business is expected to have seen strong demand during the holidays. Analysts predict ad revenue of $25.7 billion, representing 24% year-over-year growth. And Facebook’s ad revenue is so vital because it represents nearly all of the company’s total revenue.  

On top of that, Facebook is unparalleled in its ability to monetize products and services. A few of its newer products, like Facebook Shops, Instagram Checkout and Reels, are expected to have fueled even more top-line acceleration during the holiday season. 

All that being said, the headwinds Facebook faces are real, and they are not to be downplayed. VIP previously discussed Facebook and Big Tech’s regulatory reckoning and the very serious implications it could have from both a consumer and investor standpoint. As real as the threat is, Facebook and its investors have some time before the impact from any regulatory action from Congress can be felt.  

Some would even argue that a lot of the regulatory overhang is already baked into the stock price. While Facebook shares have rebounded somewhat in 2021, they are still down around 10% from their late August peak. As we know, there was a pretty important election during that period and the Federal Trade Commission along, with attorneys general from 46 states, sued Facebook. 

Until recently, much of Facebook’s woes were overlooked by the company’s undeniable ability to generate revenue, and the stock’s resilience has been confirmation of the overall positive outlook. However, Facebook stock’s reaction following its Q4 earnings results will be an updated and accurate reflection into future investor sentiment with all of the headwinds and tailwinds baked in. 

For Facebook, there is a very clear bull and bear investment thesis. The short-term bull-case investment argument is that Facebook’s usage globally suggests ts services are nearly ubiquitous and thus businesses of all sizes will continue to advertise on its platforms driving revenue gains along the way.  

Then there’s the long-term bear case of political and regulatory risk. If Congress does in fact take more decisive action against Facebook and the rest of Big Tech, serious consequences for the companies and their investors lie ahead.  

Facebook CEO Mark Zuckerberg, along with the rest of the company’s C-suite, will be facing tough questions from analysts on the conference call Wednesday evening. And regardless of how stellar the company’s fourth-quarter may have been, Facebook needs to reassure investors there is still more positive to outweigh the negative ahead.