Apple Is Shaking Facebook's Revenue

On Monday, shares of the social media giant rose 2% in extended trading as investors focused on earnings beat and looked past the massive and ongoing whistleblower scandal. However, despite better-than-expected third-quarter earnings, Facebook Inc's FB revenue missed estimates due to Apple Inc's AAPLE privacy changes.

Third Quarter Figures

Revenue in the third quarter rose 35% from a year earlier to $29.01 billion.

Net income rose 17% to $9.2 billion, resulting in earnings per share of $3.22.

Daily active users (DAUs) amounted to 1.93 billion, exactly as expected by StreetAccount analysts survey, whereas monthly active users (MAUs) amounted to 2.91 billion, slightly below the Street Account estimate of 2.93 billion. The average revenue per user (ARPU) amounted to $10.00.

Going Against TikTok

The world's largest social network is facing an existential crisis represented by an aging user base. As part of an effort to make its platforms more appealing to users between the ages of 18 and 29, Facebook will make significant changes in the next year to focus more on its full-screen video Reels feature that competes directly with TikTok.

CEO Mark Zuckerberg warned that this shift to serve these young adults will take years to be fully executed. Zuckerberg has high hopes for this feature, expecting it to ultimately it will be as significant to Facebook as the adoption of the News Feed and Stories features.

The Metaverse Is In the Making

Facebook of tomorrow should look very different than the advertising-based business of today.

The first glimpse of this transformation will be seen by the Facebook Reality Labs unit that focuses on hardware, augmented reality, and virtual reality products.

Facebook expects its investment in the hardware and VR segment to trim operating profit in 2021 by approximately $10 billion. As a reminder, it announced it is forming a team that will work on the digital universe in which multiple people can interact within a 3D environment back in July. Two months later, it announced Andrew "Boz" Bosworth, the hardware boss, will be taking over as Chief Technology Officer next year.

Fourth Quarter Guidance

The social media giant announced that as of the undergoing quarter, its Facebook Reality Labs will be included in its own reporting segment. The other revenue segment will come from its apps, including Facebook, Instagram, Messenger, and WhatsApp, as well as other services.

Fourth Quarter Guidance

Facebook expects revenue for the undergoing quarter to be in the range between $31.5 billion to $34 billion which is below analyst projections of $34.8 billion. Precautions have been taken due to significant uncertainty owed to continued headwinds from Apple's iOS 14 updated as well COVID-related factors and the overall macroeconomic environment. Just like Snap SNAP whose shares tanked 27% after its disappointing earnings report last week, even Facebook's business was disrupted by privacy changes.

What About the Facebook Files?

Frances Hagen released internal documents that showed that the number of teenage users of the Facebook app in the U.S. has declined by 13% since 2019, with a projected drop of 45% over the next two years and the number of users aged between 20 and 30 declining by 4% during that time frame, Haugen initially shared documents with The Wall Street Journal but she appeared before a Senate panel earlier this month to testify, basically saying that the company puts profit above the safety and health of its users.

The reports show that Facebook is aware of many of the harms its platforms cause, particularly to teenage girls, but is not taking action to address or rectify them. She also claimed her intention was to ‘fix' the company, not harm it.

Zuckerberg began the earnings call rebutting the claims and referred to the scandal as "a coordinated effort to paint a false picture of the company by selectively using internal documentation. Zuckerberg also expressed his opinion that social media is not the main driver of these issues which is why it probably can't fix them by itself either.

Takeaway

It seems that investors shrugged off the internal documents that showed, among other things, the detrimental effect of Instagram on teens' mental health. Earnings and the fact that the social media giant is adding $50 billion to its stock buyback program pleased investors. Despite regulators and the ongoing document dump, Facebook is preparing for a massive transformation of its business model while its ad business keeps growing at a healthy pace.

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