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Facebook's main focus is younger users: analyst

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Rohit Kulkarni, MKM Partners Senior Analyst joins the Yahoo Finance Live panel to discuss Facebook’s latest earnings.

Video Transcript

ZACK GUZMAN: But first, I want to focus in here on moves we're seeing at Facebook because that stock is down, as I said, hitting a session low after they reported after the bell yesterday. Of course, coming off the heels of Snap's record bad day after they reported and showed a massive sales slowdown. Facebook posted a similar miss here in terms of their revenue for the third quarter. Climbed 35% to 29 billion. That was a slight miss versus the 29.5 billion that analysts had been expecting looking ahead to Q4.

Ad sales also came in a bit light, missing expectations, a range of 31.5 billion to 34 versus the estimates of 34.8. But not all analysts are saying it's doom and gloom for the company as they look ahead. And for more on that, I want to kick off the back half of the show today with Rohit Kulkarni, MKM Partners senior analyst joins us right now.

And Rohit, when we look at it, you're optimistic as you look ahead. There are some other key things in the quarter here to maybe point to. Of course, that $14.4 billion buyback in Q3, increasing that to $50 billion. Talk to me about what has you optimistic, given all the pressure we're seeing on shares in the wake of the Facebook papers, other questions investors have now.

ROHIT KULKARNI: Hey, thanks for having me again. What I would say is Facebook reported probably a better than feared earnings. It wasn't great, but it could have been worse. I think after we looked at Snap, there was general anxiety as to how bad can Facebook get.

The tone of the management team, the outlook for 4Q, and the new disclosure that they're going to do with Facebook Reality Labs, plus the buybacks, all those three things add to a pretty thick silver lining in my opinion as to when you look beyond the Apple headwinds into 2022. Facebook is going to give you more disclosure, going to buy back more shares.

And obviously, they are going to disclose that the core business is generating a lot of cash. We like that. And probably a sum of parts valuation will help Facebook rerate higher as we get to '22.

AKIKO FUJITA: Even with that said, Mark Zuckerberg yesterday in the earnings call seemed to at least admit that there are concerns around growth on their key platforms, just given the demographics of their users. And he said that servicing young adults is now the north star for the company, essentially admitting that TikTok had been a very formidable competitor to some of their platforms. How much of that younger audience do you think Facebook can actually capture, given the strength that we have seen from those like TikTok as well as Snap.

ROHIT KULKARNI: Hey, look, I think Facebook has done it in the past. They probably got the eye of the ball in a way that they were focusing on too many things. Right now, they are clearly focused on a couple of things. One is video, and the second is younger demographic.

Facebook has been innovative in the past. So I think right now, I'm willing to give them the benefit of the doubt that they would be successful in attracting the younger demographic back onto the platform. Just for now, they will focus on Apple and ad tech. The last nine months, we have clearly seen that Snap earnings and various other ad tech earnings, Facebook has come out of Apple headwinds a little bit better.

So fast forward next year, if they focus on video and younger demographic, we probably should see some results sometime next year. But I agree, Zuckerberg was frustrated yesterday with the media hits as well as clearly acknowledging that TikTok and Snap have been out-executing them in this younger demographic mousetrap, if you will.

ZACK GUZMAN: Yeah, I mean, I guess, you have a similar price target here to what we heard in the last hour. 395 a share is what you have. We were talking about 400 in the 11:00 AM hour. When you talk about maybe some of the momentum though, in that competition amongst TikTok and the other opportunities out there, still showing in this report impressive user trends. I mean, how do you see that maybe holding up and what costs it's going to take to kind of, as Akiko was talking about, they're focusing on a younger demographic, what that might do for shares moving forward?

ROHIT KULKARNI: I think we won't be able to figure out how such a large ship like Facebook is actually moving under the surface with regards to 18 to 29-year-olds. We'll have to take their word for it. And then obviously, we'll have to do our own primary research.

But with the way Facebook seems to articulate their strategy, it is based on short form video as the cornerstone product that, obviously, TikTok pioneered. Snap has been copying that very fast. And if you look at what Facebook is doing with the creators and subsidizing a lot of creators, that's the toehold into getting 18 to 29-year-olds.

Take that step a little bit further, social commerce and how live viewing and short from snacking will lead to commerce is the next step in this journey of keeping 18 to 29-year-olds engaged on the platform. So those are the two things that we'll watch out for. How are the creators trending on Facebook and Instagram versus TikTok and Snap? And number two, how does that lead to social commerce?

Perhaps at the end of Q4, we might even see a big disclosure from Facebook around we sold $20 billion worth of goods on the platform, and this is how we did it. That would be something that would be a positive surprise, if they were to do that.

ZACK GUZMAN: Yeah, a contrary take as we see shares pulling back here in the session today. As you point out, Amazon, double digit growth in 2020. Google, 2021 was the year. And you're looking ahead to 2022 potentially being the year for Facebook. So we'll see how that all plays out. But I appreciate you coming on here to chat with us today, Rohit Kulkarni, MKM Partners senior analyst. Thanks again for the time.