With markets pushing to all-time highs Wednesday, we want take a moment to address an interesting note we received Tuesday from analysts at BMO Capital Markets, who upgraded shares of Facebook (FB) to "Outperform," from "Market Perform."
In their note, the analysts commented that while antitrust/political risk remains for Facebook, it has been largely priced in already. Remember, this is a potential risk to margins, as management invests heavily in platform security. The analysts also believe Facebook's "headwinds from targeting" is peaking, as Apple (AAPL) implements a prompt for App Tracking Transparency, and with it subsequent limitations on the Identifier for Advertisers, or IDFA.
Essentially, this new Apple prompt -- call ATT -- will allow users to opt out of allowing apps to track their activity across other apps and websites. The analysts referred to the new feature as a "clearing event," adding, "from here, [they] expect vertical integration for eCommerce (Payments, Shops, Marketplace, etc.) and more server to server integrations for advertising (e.g. re-worked Conversions API) to help drive a narrative about FB having greater control over its revenue destiny."
This is certainly a contrarian viewpoint, as users opting out of tracking will negatively impact the company's ability to target ads, which is why Facebook pushed back on the effort. The analysts believe, however, "that over the short-to-medium-term FB will be able to mitigate some of these losses via new tools... while over the medium-to-longer-term, we see FB lowering its reliance on targeting events/signals generated from outside its walled garden as more advertiser conversions occur in platform."
The analysts did caveat the upgraded commenting that they "may be early if financial impact is greater than modeled." But in support of the their view, we remind members that there were similar concerns over the implementation of GDPR rules and the impact that would have on advertisers' ability to target users. While it was a legitimate concern, as it did limit targeting ability, ultimately what happened was that every company was forced to comply, and the largest ones, with the most money available to adhere to the standard and develop new tools and methods, were actually able to gain market share. So, everyone took the hit, but the top names such as Facebook and Alphabet (GOOGL) remained the best places to spend ad dollars, because they still provided customers the best return on advertising investments.
A similar dynamic would not be out of the question this time around as Apple's ATT prompt will also affect all app developers, and, once again, those best able to take the hit will be the largest, most well-capitalized companies able to not only develop new tools, but also generate and synergize revenue streams within their own ecosystem. With this, Facebook can do with further vertical integration of internally developed payments and shopping platforms.