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Facebook says its privacy push could hurt advertising growth, but analysts aren't convinced

Key Points
  • Facebook expects revenue growth rates will decelerate, especially in the fourth quarter and going into 2020. It also warned about this in the first quarter.
  • That could be due to regulations like GDPR, privacy-geared changes at Facebook itself and tweaks to mobile operating systems.
  • Analysts don't seem fazed by the warnings.
Facebook founder and CEO Mark Zuckerberg meets Founder and Executive Chairman of Alibaba Group Jack Ma (not pictured), at the China Development Forum in Beijing, China, March 19, 2016. 
Shu Zhang | Reuters

Facebook is warning that changes in its ability to target ads will sting later this year and into 2020, but analysts don't seem too concerned.

Facebook receives most of its revenue from advertising. Chief Financial Officer Dave Wehner said on the company's earnings call Wednesday that he expects constant currency revenue growth rates will decelerate sequentially going forward, with a more pronounced slowdown in the fourth quarter and into 2020. That's partially because of "ad targeting related headwinds and uncertainties."

Asked by analysts on the call to elaborate, Wehner said the company is referring to headwinds in three areas. The first is regulatory changes like last year's General Data Protection Regulation in the European Union. The regulation was meant to give individuals power to control their data, including the ability to demand that companies disclose how their data is being used or ask them to destroy it. After GDPR implementation, Wehner said, Europe saw a renewed acceleration of growth in the second quarter versus the first, but said the region is growing more slowly than in North America and APAC

Another factor focuses on privacy from operating systems "and the impact that that can have on measurements and also on targeting," Wehner said. More stringent privacy rules for Apple or Google's mobile operating systems could prove challenging in Facebook's ability to track or collect information from its users.

Lastly, he cited Facebook's own product changes "as we put privacy more front and center." Examples include a tool allowing users to clear information that Facebook collects about them from third-party apps and websites. Earlier this month, Facebook also announced that users now have the ability to see more information about the businesses uploading lists of their information, and the advertisers using those lists to target ads.

Analysts seem to mostly be shrugging these warnings off.

Jefferies analysts said in a note Thursday that while those ad targeting headwinds could have a "slight impact" on the business, management "had the same cautionary language in Q1 and the constant currency revenue growth rate accelerated sequentially." Wehner last quarter did say the company anticipates that ad targeting-related headwinds would be more pronounced in the second half of 2019.

MoffettNathanson said in a note that though Facebook warned about slower growth in the coming quarters due to potential ad targeting headwinds, "the international results would argue against that."

"There doesn't seem to be a good explanation why these aggregate markets would quickly decelerate after just accelerating for the first time in over two years," the note says. "If there is pause in stabilization, perhaps it will come from North America where growth remained at or near 30% (as has been the case for the past year.) Our channel checks point to the growing advertiser embrace of Stories, which has added massive amounts of low cost impressions to the system."

A note from Bank of America Merrill Lynch analysts said they were optimistic about Stories, messaging and video monetization, as well as Instagram and WhatsApp e-commerce, aiding revenue growth and offsetting those privacy headwinds. They also cited strong ad revenue and average revenue per user growth in Europe "despite GDPR headwinds." Europe saw ad revenue growth of 25% in the quarter, "an acceleration from 21% in Q1 as FB lapped GDPR implementation last year," they wrote.

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