Facebook Says Apple Ad-Tracking ‘Headwinds’ Will Slow Growth

(Bloomberg) -- Facebook Inc. reported higher second-quarter sales and profit but struck a cautious tone looking ahead, saying growth could stall as Apple Inc.’s new rules pinch data collection on mobile devices and as pandemic-fueled advertising gains subside.

The social media giant said it faces “ad targeting headwinds in 2021 from regulatory and platform changes,” sending the shares down as much as 5.2% in extended trading.

The warning came as the company reported quarterly sales climbed 56% to $29.1 billion, compared with the $27.9 billion average estimate of analysts, according to data compiled by Bloomberg. In a statement Wednesday, Facebook reported 1.91 billion daily active users for its flagship social network, just matching projections. The company’s user numbers in the U.S. and Canada were unchanged from the prior quarter.

The stock’s tumble reflects investor concern that Facebook’s robust sales growth and user additions during the pandemic may ease up as people spend less time on their phones and laptops. Facebook has been telling investors that Apple’s new restrictions on data collection on iPhones, which require users to explicitly allow app makers to track their activity, could curb future growth by hampering its ability to sell targeted advertising -- a crucial Facebook tool that has given it an edge with large brands and small businesses looking to reach precise groups.

“In the third and fourth quarters of 2021, we expect year-over-year total revenue growth rates to decelerate significantly on a sequential basis as we lap periods of increasingly strong growth,” Facebook Chief Financial Officer Dave Wehner said in the statement.

The stock fell as low as $354 in extended trading following the report, after closing at $373.28 in New York. The shares have jumped more than 36% this year.

Net income in the second quarter more than doubled to $10.4 billion, or $3.61 a share, Facebook said. Analysts on average estimated profit would be $3.02 a share. In the same period last year, earnings were $5.18 billion, or $1.80 per share.

Facebook, which also owns Instagram and WhatsApp, has benefited from pandemic lockdowns as users flock to its networks to connect with friends and enjoy at-home entertainment. Businesses -- from large consumer brands to mom-and-pop shops -- shifted more of their advertising budgets to Facebook’s sites and other digital outlets to reach more customers as they stayed home to avoid the spread of Covid-19.

But the company has said for several quarters that its advertising business faces risks from Apple’s recent iOS software update, which asks users of each app whether they are willing to allow their activity to be followed across the internet. Apple’s changes will have a greater impact in the third quarter than they did in the June period, Wehner said in the statement. Analysts on average had predicted sales growth of 32% and 20% in the next two quarters, according to data compiled by Bloomberg.

Industrywide, users are opting to give apps permission to track their behavior only 25% of the time, according to Branch, which analyzes mobile app growth. Less tracking makes it harder for Facebook and other online companies to tailor their ads to help business find their most promising customers.

Facebook has argued that Apple’s new privacy rules will hurt small businesses that rely on targeted advertising and don’t have the money to spend on broader marketing campaigns. Small businesses make up the bulk of Facebook’s ad sales.

The company, which has been the subject of escalating regulatory scrutiny over the past few years over its content policies, social-media market dominance and privacy practices, notched a recent win on that front, though it still faces the possibility that antitrust enforcers will seek to break up its business. Last month, Facebook won a court ruling to dismiss two monopoly lawsuits filed by the U.S. Federal Trade Commission and a coalition of states that sought to break up the company.

The ruling pushed Facebook’s market value to more than $1 trillion, though it left open the door for an appeal by the FTC. On Wednesday, the states filed a notice of their appeal in federal court in Washington.

The Menlo Park, California-based company has also been chasing future growth by investing in new e-commerce tools that let small businesses sell their goods directly on Facebook’s properties, aiming to stay competitive with brick-and-mortar stores even when the pandemic ends.

Last month, Instagram announced a tool to make it easier for retailers to offer augmented reality-powered try-on services, allowing potential customers to see how products such as makeup and shoes look on their real faces and bodies. Facebook is also expanding the ways companies can communicate with their customers using WhatsApp, such as alerting people when a popular item is back in stock.

Facebook has also been debuting new products and monetization programs to lure popular social media creators away from its younger rivals like Bytedance Ltd.’s TikTok and Snapchat Inc. Last month, Facebook Chief Executive Officer Mark Zuckerberg unveiled a subscription newsletter product called Bulletin. The social network also recently launched a slate of podcasts and added a feature called Live Audio Rooms, virtual rooms where users can host live discussions.

In the longer term, Zuckerberg sees virtual and augmented reality-powered devices as the next major platform for human communication, after mobile phones, eventually replacing some in-person social interactions. Oculus, the social network’s hardware division, last year unveiled Quest 2, an all-in-one virtual reality headset. The company is also building an augmented reality-powered wristband and glasses. Facebook will soon face significant competition when Apple releases a rival VR device.

©2021 Bloomberg L.P.