Unpacking Meta’s grim Q4 earnings

Meta, née Facebook, saw its share price drop by more than 20% in after-hours trading after announcing its Q4 earnings results yesterday. As I write this, a share of the company’s stock is priced at $249.05, compared to $351.24 six months ago and $268.10 one year ago. The company’s market cap, which reached more than $1 trillion in late June of last year, currently sits at just below $700BN.

Apple’s App Tracking Transparency (ATT) privacy policy dealt a punishing blow to Meta. That this result was ineluctable has been obvious since the policy was announced in June of 2020, but it was probable — or, at the very least, foreseeable — long before that. In 2017, I wrote The coming war between Apple and Facebook, in which I detailed why Apple might revoke access to the unique iOS device identifier (IDFA) used in digital advertising measurement as a means of arresting Meta’s formidable growth. And in February 2020, four months before Apple introduced ATT, I wrote Apocalypse Soon: What happens when the iOS advertising ID is deprecated?, in which I laid out a hypothetical chain of events stemming from an announcement by Apple that the IDFA would be deprecated.

ATT, or a policy like it, has been anticipated by the advertising ecosystem for years. And yet the damage to social platforms’ stock prices from ATT has thus far been incurred in waves, quarterly, as public markets jolt awake to the reality of ATT. In January 2021, more than a year ago, I wrote Facebook may take 7% revenue hit from Apple privacy changes. In the post, I presented a multiple-scenario analysis of how ATT might degrade Facebook’s ability to target ads on behalf of advertisers — and thus serve as a detriment to the company’s revenue engine — with worst-case, base-case, and best-case outcomes. As I noted after Meta’s Q3 earnings report, even my initial estimate of the worst-case scenario in that post was optimistic. And with the added context of this quarter’s result, the worst-case scenario from that analysis looks downright sunny.

For Q4, Meta beat analyst expectations on advertising revenue at $33.67BN (vs. $33.4BN expected), but it missed the top end of its guidance from last quarter’s earnings call, which was $34BN. Meta missed expectations on EPS at $3.67 (vs. $3.84 expected). But notably, Meta’s DAU decreased from Q3 to Q4, with its MAU up by just 2MM.

In its earnings call, Meta ascribed its soft Q4 performance to the combination of ATT and supply chain dysfunction (I describe this unfortunate confluence of circumstances in this article). But ATT as a specific ailment dominated Meta’s earnings call with analysts. The entire call is instructive, as a number of important acknowledgments were made by Meta’s CFO David Wehner, but I believe this response from Sheryl Sandberg provides the most context for just how long ATT will continue to bedevil Meta’s advertising performance:

On the question of what we need to see to rebuild ad products and continue to grow return on ad spend. In the short run, as I talked about, we’re working on measurement, we’re rolling out new to help businesses continue to measure campaigns using Apple’s SK ad network, API and Meta’s aggregated events measurement and conversion modeling. So we have specific products that people can adopt that help us.

Over the longer term, we need to develop privacy-enhancing tech to help minimize the amount of personal information we learn and we use. Use more aggregate, use more anonymized data while still allowing us to show relevant ads and that’s going to take us time. But one thing I do want to point out is there are also a lot of things that small businesses and large businesses can do to take advantage of the many targeting and measurement tools we have. So while we have seen an impact from these changes, we also didn’t start from a place where 100% of our millions and millions of advertisers are using the tools that are available.

So while we continue to get those that were all the way on the adoption curve to learn and adapt to these changes, there are also advertisers out there that aren’t giving even the basic things yet that we can continue to work on and improve their performance. We still believe there’s a lot of performance improvement left in the system.

The effort Sandberg describes in the Meta earnings call is a long-term rehabilitation of Meta’s advertising business: not an exercise in updating cabinets and replacing carpet with wood flooring, but rather a tear-down and build anew scenario. Meta’s advertising infrastructure must be replaced completely as a result of ATT and other privacy initiatives that are imminent. The company has foreshadowed this rebuilding effort through public proposals, and those are impressive and, in some cases, very elegant. But they are long-term projects.

In the meantime, the frictions of ATT take a toll. And not just on Meta; Snap’s stock dropped 17% after hours following Meta’s earnings release. Using historical growth rates as a baseline, which are admittedly not perfect, Meta lost more than $10BN in advertising revenue over the second half of 2021 as a result of ATT. The model below is the same one used in this post, updated with Q4 2021 data.

Something that deserves clarity: ATT is one manifestation of a broader privacy trend that will ultimately upset the open transfer of data between 1st party and 3rd party contexts. I’m an advocate for that disruption, as I detail in The IDFA is the hydrocarbon of the mobile advertising ecosystem. But ATT is by no means the only initiative to attempt this, and in fact, the privacy landscape within consumer technology has been inching in this direction for many years.