Facebook underreports results of advertising business on iOS devices, Sprout surpasses $200M in ARR and other notable stories from this week.
Welcome to “#SocialStocks,” The Fly’s weekly recap of Wall Street’s reactions to social media stock news.
The Subcommittee on Competition Policy, Antitrust & Consumer Rights held a hearing entitled, “Big Data, Big Questions: Implications for Competition & Consumers” with Sheila Colclasure, global chief digital responsibility & public policy officer at IPG Kinesso, Steve Satterfield, VP of privacy & public policy at Facebook (FB) and Markham Erickson, VP of government affairs & public policy at Google (GOOG, GOOGL) yesterday. Cristiano Lima of the Washington Post reported senators took a detour from the focus on competition to lay into Facebook over the report suggesting it downplayed Instagram’s toxic impact on teen girls. Reportedly, a majority of the senators who attended used part of their questioning to grill Facebook about the Wall Street Journal report that the company has research showing Instagram is harmful for a cluster of young users, particularly teenage girls. Senator Mike Lee, the top Republican on the Senate Judiciary antitrust subcommittee, said the Journal’s reporting showed “shocking, absolutely stunning lapses in Facebook’s ability to protect Facebook’s consumers, its users, from being harmed by using its platforms.” He connected the issue to competition, contending the incident shows Facebook acts with exemption from punishment. “This too looks like the behavior of monopolies, a monopolist that’s so sure its customers have nowhere else to go that it displays a reckless disregard for quality assurance, for its own brand image and even just being honest with its own users about the obvious safety risks that it’s subjecting its users to, particularly its teenage users,” Lee said.
IOS IMPACT ON FACEBOOK:
Facebook said in a blog post that it is underreporting the results of its advertising business on iOS (AAPL) devices. “We’ve heard from many of you that the impact on your advertising investment has been greater than you expected,” VP of Product Marketing Graham Mudd said in a post directed at business partners. “The cost of achieving your business outcome may have increased and it’s also gotten harder to measure your campaigns on our platform. In some cases, this is due to underreporting on our part. Our estimate is that in aggregate we are underreporting iOS web conversions by approximately 15%; however there is a broad range for individual advertisers. We believe that real world conversions, like sales and app installs, are higher than what is being reported for many advertisers… We’re on this journey with you as our business also navigates and adapts to these changes. As we noted during our earnings call in July, we expected increased headwinds from platform changes, notably the recent iOS updates, to have a greater impact in the third quarter compared to the second quarter. We know many of you are experiencing this greater impact as we are. We’re optimistic about our multi-year effort to develop new privacy-enhancing technologies that minimize the amount of personal information we process, while still allowing us to show personalized ads and measure their effectiveness. Those efforts will take time, but there are actions you can take right now to maximize performance in this new environment while still respecting people’s privacy. Today, we are sharing a detailed list of those actions as well as the steps we’re proactively taking to help you. We’re working hard to ensure that most of these improvements are made before the busy holiday shopping season.” Facebook said that actions it is taking to address performance issues include improving conversion modeling, accelerating investments, tracking web conversions, enhancing measurement, and adapting quickly after discovering bugs. Baird analyst Colin Sebastian told investors that the company’s updated IDFA commentary is largely consistent with the firm’s prior industry checks, and continues to believe there may be upside vs. Street estimates for Facebook in the near-term due to privacy headwinds. The analyst maintained his Outperform rating or $390 price target.
SPROUT HITS MILESTONES:
Sprout Social (SPT) announced it has surpassed $200M in annual recurring revenue, or ARR. Additionally, Sprout now serves more than 30,000 customers across the globe, which the company says underscores both its market expansion and accelerated growth rate. “$200M in ARR is a remarkable achievement for our company,” said Ryan Barretto, president of Sprout Social. “We’ve doubled ARR in roughly two years and we’re growing at a faster pace at $200M than at $100M, which is a true testament to the execution of our teams. We’re happy to celebrate these milestones, but we also believe that the best is yet to come.” Additionally, the company released its new ESG website and held its investor day today. KeyBanc analyst Michael Turits raised the firm’s price target on Sprout Social to $153 from $112 and reiterated an Overweight rating on the shares ahead of analyst day on Monday. Accelerating Q2 growth reported from both Sprout and competitor Sprinklr (CXM) implies continuing strong social media management demand coming out of COVID with Digital Transformation, Turits contends. After delivering/guiding greater than 40% growth for Q2/Q3, the analyst believes Sprout Social could address medium-term growth and margin expectations. He also expects insights into increasing enterprise traction, as well into the technical capabilities of Sprout’s platform.
FIVE9 TAKEOVER MET WITH OPPOSITION:
On Friday, Proxy advisory service ISS recommended that investors vote against Zoom Video’s (ZM) agreement to buy Five9 (FIVN), according to an on-air report from CNBC’s David Faber. Piper Sandler analyst James Fish upgraded Five9 to Overweight from Neutral. After speaking with Five9 investors and learning of the Institutional Shareholder Services recommendation to vote against the Zoom Video takeover, the analyst sees an increased probability of his “top scenario” of Zoom having to offer a sweetener to “make investors whole.” Fish also sees an increased probability of an out-right deal rejection that reverts Five9 back to standalone valuation. The risk/reward setup for Five9 is attractive ahead of the shareholder vote on September 30, Fish told investors in a research note. He sees “multiple scenarios for share upside.”
Fast forward to yesterday when the Wall Street Journal’s Kate O’Keeffe, Aaron Tilley and Dawn Lim reported a Justice Department-led, interagency committee, “known as Team Telecom,” is investigating Zoom’s agreement to buy Five9, citing potential national-security risks posed by the videoconferencing giant’s China ties. In the letter, the Justice Department requested the FCC defer action on the application until Team Telecom finishes its review, the report stated. A Zoom spokeswoman told the Journal: “The Five9 acquisition is subject to certain telecom regulatory approvals. We have made filings with the various applicable regulatory agencies, and these approval processes are proceeding as expected.” Zoom said it expects to receive regulatory approvals by the first half of next year, which “could still leave it on track to close the deal when it had planned,” the report added. The letter, dated August 27, read: “On behalf of the Committee for the Assessment of Foreign Participation in the United States Telecommunications Service Sector (“the Committee”), the U.S. Department of Justice (“USDOJ”) requests that the Commission refer the above-referenced application to the Committee for review pursuant to Executive Order (“E.O.”) 13913, to determine whether this application poses a risk to the national security or law enforcement interests of the United States. USDOJ believes that such risk may be raised by the foreign participation (including the foreign relationships and ownership) associated with the application, and a review by the Committee is necessary to assess and make an appropriate recommendation as to how the Commission should adjudicate this application. As with any application that is referred to the Committee, USDOJ further requests that the Commission defer action on this application until the Committee has concluded its review.”
Separately, Cathie Wood’s ARK Investment bought 99K shares of Zoom Video on Tuesday.
TWITTER SETTLES CLASS ACTION LAWSUIT:
Twitter (TWTR) announced that it has entered into a binding agreement to settle the consolidated class action lawsuit commenced in 2016 in the United States District Court for the Northern District of California. The case was consolidated under the caption In re Twitter, Inc. Securities Litigation, Case No. 4:16-CV-0534-JST. The proposed settlement resolves all claims asserted against Twitter and the other named defendants without any admission, concession or finding of any fault, liability or wrongdoing by the company or any defendant. Twitter and the individual defendants continue to deny any wrongdoing or any other improper actions. Under the terms of the proposed settlement, Twitter will pay $809.5M for claims alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The company intends to use cash on hand to pay the settlement amount, which is expected to be paid in the fourth quarter of 2021. The company expects to record a charge for the settlement during the third quarter of 2021. The final settlement agreement will be subject to approval by the Court.
SNAP AND PINTEREST MOMENTUM:
Loop Capital analyst Alan Gould keeps his Buy rating on Snap (SNAP). The company continues to show the best revenue growth momentum in the Internet advertising sector with significant monetization upside to match other networks, the analyst tells investors in a research note. Gould adds that he expects Snap’s core advertising business to remain a powerful driver for the near and medium term, and he is confident that at least two new surfaces for engagement will evolve into meaningful revenue opportunities over time.
Vertical Group analyst Phil Leggiere said Pinterest (PINS) continues to see “expanding and strengthening” adoption by e-commerce merchants, which bodes well for “future growth upside.” While product shortages in some key Pinterest verticals, including home decor, footwear and beauty products providing some short-term headwinds, sources expect solid year-over-year growth this holiday season “in a range comfortably above pre-Covid baseline of 35%,” Leggiere told investors in a research note. Further, the company’s recent moves to enable its merchants to optimize ads to promote products in different national markets “could also widen its ad spending base,” says the analyst. Leggiere remains bullish on shares of Pinterest.
Originally Posted on September 22, 2021 – #SocialStocks: Outrage Over Instagram’s Impact on Teens Erupts In Senate Hearing
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