There has been a ripple in social media stocks following Snap’s (SNAP) Q3 earnings last week. This is because Apple’s (AAPL) iOS changes affected SNAP more than expected, stoking fear among investors that other social media companies could also be adversely affected ahead of their Q3 earnings.
Indeed, since SNAP’s earnings release, social media stocks like Facebook (FB), Twitter (TWTR), and Pinterest (PINS) have fallen by 3.2%, 4.9%, and 6.2%, respectively.
In this article, using the TipRanks stock comparison tool, we will compare Facebook and Snap, and look at how Apple’s iOS changes affect these companies in Q3. We will also examine how Wall Street analysts feel about these stocks.
Facebook (FB)
Yesterday, Facebook reported a mixed bag of Q3 earnings. The social media giant posted revenues of $29.01 billion, up 34% on a constant currency basis, but fell short of consensus estimates of $29.58 billion. The company continues to face revenue headwinds in Q3 as a result of Apple’s iOS 14 changes.
Here, the iOS 14 changes refer to the changes that came into effect after the launch of Apple’s iOS 14.5. This resulted in app developers being unable to track a user’s Apple’s Identifier For Advertisers (IDFA) if a user opts out of sharing privacy details while downloading an app from AAPL’s app store.
According to Facebook’s COO, Sheryl Sandberg, these changes resulted in a decline in the accuracy of ad targeting, resulting in higher costs of “driving outcomes for our advertisers. And the other is that measuring those outcomes became more difficult.”
The company had daily active users (DAUs) of 1.93 billion on average, up 6% year-over-year. Diluted earnings came in at $3.22 per share, ahead of consensus estimates of $3.19 per share.
A key announcement made by Facebook was that starting from Q4, the company will report Facebook Reality Labs (FRL) as a separate segment, as FB is investing significantly in augmented reality (AR) and virtual reality (VR) products. (See Analysts’ Top Stocks on TipRanks)
FB will have two reporting segments as a result of this change: Family of Apps and FRL. Family of Apps will include Facebook, Instagram, WhatsApp, Messenger, and other services. Moreover, the company expects that FRL will drag down its operating profit in FY21 by around $10 billion.
In Q4, the company has projected total revenues to be in the range of $31.5 billion to $34 billion, reflecting “significant uncertainty” as a result of “continued headwinds from Apple’s iOS 14 changes, and macroeconomic and COVID-related factors.”
However, Wells Fargo analyst Brian Fitzgerald opined that while the iOS headwinds remain, “FB is making good progress on iOS measurement, and expects to recover about half of lost conversion visibility (~15% under-reporting) by year-end.”
Facebook remained on the analyst’s Signature Picks list post Q3 earnings and he rated the stock a Buy, but reduced the price target from $450 to $425 (29.3% upside) on the stock. Fitzgerald outlined the reasons for his bullishness, including FB’s progress against iOS 14 changes. Furthermore, he is heartened by the company’s significant investment in metaverse that shows promise and is likely “to substantially mitigate platform risk.”
What’s more, Fitzgerald believes that the recent whistle-blower controversy and political scrutiny are unlikely to affect the stock over the long term. He does view the entire affair as a negative for FB, though.
Wall Street analysts echo Fitzgerald’s view and remain bullish, with a Strong Buy consensus rating for Facebook based on 27 Buys, 5 Holds, and 1 Sell.
The average Facebook price target of $411.94 implies 25.3% upside potential from current levels.
Snap (SNAP)
Snap is another company that was adversely affected by Apple’s iOS 14 changes in Q3. The stock fell 27.4% after its third-quarter earnings release. In Q3, the social media company’s revenues of $1.07 billion missed the consensus estimate of $1.1 billion. Revenues jumped 57% from the same period last year.
The company’s adjusted earnings of $0.17 per share surpassed analysts’ estimates of $0.08 per share, while daily active users (DAU) soared 23% year-over-year to 306 million.
Nonetheless, Snap’s CEO and co-Founder, Evan Spiegel, cautioned, “We’re now operating at the scale necessary to navigate significant headwinds, including changes to the iOS platform that impact the way advertising is targeted, measured, and optimized, as well as global supply chain issues and labor shortages impacting our partners.”
Spiegel pointed out at the company’s Q3 earnings call that supply chain challenges would result in advertisers becoming wary of generating additional customer demand, as they would be unsure about fulfilling orders, due to supply constraints. (See Insiders’ Hot Stocks on TipRanks)
Wells Fargo analyst Brian Fitzgerald viewed the pullback in SNAP shares as “an attractive entry point,” as he expects “advertiser partners to work with SNAP through conversion visibility challenges, adjust ROAS [return on advertising spend] targets and eventually scale budgets back up even if conversion visibility remains more limited going forward.”
ROAS is a marketing metric that measures the revenue earned for every dollar that is spent on targeted digital advertising.
Fitzgerald is still optimistic about the stock post its Q3 earnings, rating it a Buy but lowering the price target from $95 to $75 (37.6% upside) on the stock.
The analyst noted other key positives for the stock, including rising DAUs, the popularity of its AR Lenses, especially in the fashion and beauty category, and the doubling of content submissions on Spotlight quarter-on-quarter.
Spotlight is a platform from SNAP that shares the most entertaining Snaps from users.
Turning to the rest of the Street, Wall Street analysts are cautiously optimistic about Snap, with a Moderate Buy consensus rating based on 20 Buys, 6 Holds, and 1 Sell.
The average Snap price target of $76.48 implies 40.3% upside potential from current levels.
Bottom Line
It appears that analysts are more certain about Facebook weathering the iOS 14 changes than Snap, as they remain bullish about FB but are cautiously optimistic about SNAP.
Indeed, Wells Fargo analyst Brian Fitzgerald commented that FB’s Q3 results “were arguably better than feared and outperformed SNAP’s 3Q by some measures (e.g., relative decel [deceleration] in 2-yr revenue growth CAGR).”
However, SNAP seems to offer a better upside potential over the next 12 months.
Disclosure: At the time of publication, Shrilekha Pethe did not have a position in any of the securities mentioned in this article.
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