Facebook Goes Fishing for Likes From Wall Street

Social media is far from perfect, but it is a game—for better or for worse—that is won by comparison.

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Facebook’s FB 1.26% shares rose nearly 2% on Monday after the company said its total revenue growth in the third quarter fell by more than 20 percentage points on a sequential basis due to Apple’s AAPL -0.03% recent changes to its iOS system which limit user tracking. The company’s forecast for total revenue growth from a year earlier in the fourth quarter was also about 7 percentage points shy of analyst estimates at the midpoint of the guidance range.

Still, on the heels of competitor Snap’s earnings report last week, Facebook’s picture looked relatively polished. Snap shares have shed more than 27% of their value since the company reported a sequential revenue-growth slowdown of nearly 59 percentage points, and guided to fourth quarter on-year revenue growth that was 20 percentage points below analysts’ forecast, citing the iOS changes as well as global supply-chain issues.

Facebook’s shares fell more than 5% on Friday following Snap’s report—their worst day since last October, eclipsing all single-day declines precipitated by The Wall Street Journal’s series of investigations on the company, which began last month.

Notably, despite new reports from over a dozen news organizations over the last few days on internal Facebook documents, Facebook’s shares closed up Monday in advance of its earnings report. The takeaway here isn’t a new one: For all the negative press surrounding Facebook over the years, investors still seem to give priority to Facebook’s financial growth.

In that respect, Monday’s report included some promise. The company said in its earnings release that, beginning in the fourth quarter, it will break out a new reporting segment called “Facebook Reality Labs.” This new segment will cover its metaverse ambitions, including augmented and virtual reality related hardware, software and content, according to the company.

Facebook said it expected its investments in the new segment would reduce its overall operating profit in 2021 by approximately $10 billion. Chief Executive Mark Zuckerberg said Facebook’s goal was for the metaverse to reach one billion people and generate hundreds of billions of dollars in digital commerce this decade.

In a conference call Monday, Mr. Zuckerberg also pointed to Reels, Facebook and Instagram’s video-based TikTok-like feature, as a key near-term growth driver.

Jefferies analyst Brent Thill estimates Reels and Shops, the company’s online storefront feature for businesses on Facebook and Instagram, could potentially be multibillion ad businesses next year for the company. He likened the launch of Reels ads to Stories ads, which he noted became the company’s largest impression driver within 18 months of launch. On Monday’s call, Mr. Zuckerberg said he is optimistic Reels can be as important for Facebook as Stories has been.

Current advertising headwinds aside, those are two huge sources of future revenue for a company whose shares are down more than 13% since mid-September, shedding more than $140 billion in market value over that period. For big tech investors, that kind of move sparks a broader comparison. Five years ago, Facebook was trading at a 35% premium relative to forward earnings compared with the average multiple of big tech peers Microsoft, MSFT -0.33% Apple, and Google parent Alphabet. Today, it is trading at a nearly 26% discount on the same basis.

For investors looking for a deal amid a scorching hot market for tech, Facebook’s valuation alone should merit a lot of likes.