Snap is 'way ahead of Facebook' in regard to the metaverse: Analyst

Facebook reported mixed third quarter earnings that missed on revenue. Jefferies Analyst Brent Thill joins Yahoo Finance Live to discuss.

Video transcript

AKIKO FUJITA: We've got to begin though, Zack, this hour with shares of Facebook because investors digesting a lot of the numbers that came out after the bell yesterday. We are seeing it down right now in the session. More than 2% earnings did beat. But revenue came in slightly weaker than the Street expected-- at $29 billion. Daily active users remaining steady while average revenue per user came in slightly weaker than expected.

Having said that, we did hear from Mark Zuckerberg for the first time yesterday. That earnings call responding to what has now become known as the Facebook papers and the documents leaked by whistleblower Frances Haugen. Zuckerberg saying law and organization should be scrutinized. But he believes Facebook is being unfairly targeted for issues that aren't all necessarily under the company's control. Take a listen.

MARK ZUCKERBERG: Good faith criticism helps us get better. But my view is that what we are seeing is a coordinated effort to selectively use leaked documents to paint a false picture of our company. The reality is that we have an open culture where we encourage discussion and research about our work so we can make progress on many complex issues that are not specific to just us.

AKIKO FUJITA: So Zack, you heard Mark Zuckerberg there saying that he believes there's a coordinated effort to misrepresent what the company is actually doing-- a line that we have heard from Facebook in several blog posts they have put out in response to this drip of reporting of stories that have come out.

But interesting to hear from him directly yesterday, again, highlighting the investments the company's made to try and make their platforms safer. And he says this narrative that the company is choosing profits over safety, simply is not true.

ZACK GUZMAN: Yeah, and I mean, I would put that more in kind of, I guess, the column of softer issues maybe at Facebook. I mean, it's a large issue. But when we talk about, maybe, issues that they run into in the past in terms of impacting advertising dollars, those, necessarily, have always been overblown as we've discussed on the show, Akiko.

But when you kind of dig into the growth factor, we also heard similar to what we heard from Snap. That kind of sparked a lot of the sell off in social media stocks around Apple's privacy updates and impacting sales there. You look ahead to the fourth quarter projections, and you're looking at $31.5 billion to $34 billion. The Street was at an average of $34.8 billion. So that's coming in a bit weaker there.

And you've brought up this point a few times, Akiko, in terms of distractions, in terms of whether or not Facebook is trying to kind of talk about the metaverse to get people off the scent of the Facebook papers, whether or not they're kind of trying to talk about maybe changing their name to get people off of that too.

And you wonder how much of, maybe, increasing the share buybacks here. That was another big thing in terms of maybe, again, trying to get people off of the slowdown in forecasted ad revenues here when you're thinking about buying back $14.4 billion of stock in Q3 and increasing that to $50 billion. That could be, maybe, perhaps, another notch in the whole distraction camp.

AKIKO FUJITA: Yeah, let's bring in another voice into the conversation here. We've got Brent Thill who is Jefferies analyst. And Brent, let's start with that slowdown that we saw in revenue. In many ways, Facebook, and of all the social media companies that had very well messaged the fact that they anticipate a bit of a pullback coming from Apple's new privacy feature. Sheryl Sandberg yesterday on the call, saying that the impact from that hit critical mass in Q3. What stood out to you in the numbers on that front?

BRENT THILL: I think everyone's seen a slowdown. This is apples overhang. And they're the one kind of creating the strain for the advertising industry. So Snap, the rest of the industry is going to feel this in the short-term as they work around the privacy changes that Apple's changing. Many are saying and Apple is doing this to then keep the data for themselves, to create their own ad network. So we'll see what happens there. Obviously, they'd be in the hot seat if that happened.

But ultimately, I think the numbers were a little bit better than feared. The fear was a lot worse. And the outlook, obviously, was, I think, a little bit challenged. The investment in the younger audience, the increase of capex by 70%, the operating expense was higher. And many believe, again, they broke up the metaverse and said that they're spending billions of dollars on the metaverse and that next generation.

I think many people are worried-- are they foreshadowing that the current version of Facebook is done? We don't think it is. So I think, look, there's a big tug of war between the bulls and bears right now. The bulls will say, "It's 18 times earnings. It's cheap. It's trading at a discount to the marked." And ultimately, a lot of these fears are baked in. The bears are going to keep arguing, "Regulatory, regulatory, and regulatory." They're going to get broken up. They're done. People are leaving. They're going to different platforms.

So either the debate's going to rage on ultimately, I think. Everything's got a price. And then 18 to 20 times earnings. We think this company is capable of $20 of earnings power. So if you put a 20 multiple on $20 of earnings, you're at $400 in the stock. So stock goes higher over time. Just look at the chart. And they've shrugged off all these regulatory issues.

And I don't think advertisers are leaving in droves. It's the first time we've seen advertisers say, like, "We're not seeing quite as good at targeting." But they're obviously not going to completely bail from Facebook. They're going to try other platforms. And hopefully, Facebook can figure out the workaround and come back and show better targeting.

And as they said on the call, they're effectively under reporting the true efficiency of that ad spend, because they just can't get quite the clarity. But they think the ROI is higher than what they're reporting. So look, yeah. Right now I think the attention is going to get all their names in the short-term and a lot of these social and ad names are going to be in a timeout.

ZACK GUZMAN: Yeah, I'm less interested, maybe, in the regulatory push here and then talk about the Facebook papers. I'm more interested in kind of the concept of Facebook, maybe, realizing you can't prioritize and optimize for your older audience all the time. And I suppose, maybe, a few of those people are on Facebook rather than Instagram and some of these other platforms out there.

But how important is that to you though, in terms of competing with the TikToks of the world and whatever might come next in really trying to continue to spend to attract a younger audience? And how important that is, perhaps, on maybe weighing on earnings moving forward as you talk about the capex expenditure?

BRENT THILL: Yeah, I mean, I think the move to the younger audience is smart, which is those are the next generation of users they want to keep for a long time. And Snap has done a phenomenal job of doing that. So TikTok's doing a great job.

And if you look at where teenagers are spending time, they don't have their head down on their phone after school on Instagram. They have their head down on Snap because they can see their buddies on the snap map. They can see all the stories and everything that's getting posted. They can see the video games, the content. And Facebook really doesn't have that level of detail.

And that's why all the younger audience is on Snap. And I see the robots walking around after school and they're not on Facebook. So they want to capture those users because they want to grow up with them. And Snap has done a really nice job of starting to age up with those users. So that doesn't mean-- just to put it in context-- that doesn't mean that earnings fall because they do that. It's just they attract potentially a different audience and user on the ad side, which I think is good.

I don't think they're going to abandon the grandmother that's sows in Southern Minnesota, where I grew up. I don't think they're going to abandon that. But, yeah, they need to put more attention there because that's the next generation of users. And I think, ultimately, it's the right thing to do. I think the metaverse is the right thing to do.

I mean, if you look at Snap today, they have the closest thing to the metaverse. You can try on clothes and see how they match right now with these augmented reality lenses. I mean, Snap is, in my opinion, way ahead of Facebook there. So we've got a lot of work to do.

So look, we've seen this before. I mean, Microsoft-- everyone thought Microsoft was done when Windows was done. And that stock's come from 30 to 300. So never underestimate the power of these platforms. And Yeah, they're probably at a pit stop and it's unclear exactly how long we'll stall out. But just don't underestimate it. And we said this for Microsoft for a decade. You can't rule them out.

AKIKO FUJITA: Brent, specifically on the potential that you see in the metaverse for Facebook. I mean, we know Facebook's going to begin breaking out the Facebook Reality Labs and reporting in Q4. They've already talked about this $10 billion investment this year. Mark Zuckerberg has talked about this is a decade-long project. But I wonder how much-- if you're talking, specifically, the stock move and how you price it, how big of a driver is this segment of the business really? How are you looking at that?

BRENT THILL: Well, it's not going to be really material on the short-term. But long-term it is. And I think of, again, all the things that you can do in this next world and what this brings in. So it's going to enhance the commerce capability. So if you can put a pair of glasses on or you can look at things differently and make decisions better based on better technology, like, your ability to transact is higher.

So if you go into Facebook shops today, it's OK. It's not amazing. But when you have a richer experience and you're able to put the pants and the shirt on or put the coat on, and look at, does this match my ski helmet or whatever you're doing, you can transact. And that is incredible for their commerce business repayments. It's great for their small business merchants.

And so, I think, as Mark has said, this is still years out. It is not going to happen right away. It is in no doubt this kind of concept of the richer next world. And then you bring into, "Hey, there's going to be a lot of other things that come into play with exchange and users and currency. You have this whole NFT world, which I think is pretty exciting to buy some of these digital goods."

So I think what he has said is that this is an investment for the technology community. It's not just Facebook. Nvidia and many of the other vendors are going to kind of benefit from this move. And they're not the only one going out for it. We've said Snap is already ahead of them, in our opinion, in terms of these experiences. Younger audience number one. And then the experience today-- Snap's ahead. So if you want to play the metaverse right now, I think Snap's a better way to play it. Facebook will get there.

AKIKO FUJITA: Brent, you've been bullish on Snap for some time. It's interesting to get that perspective for today. Brent Thill, Jefferies analyst, it's good to have you on the show today.