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Facebook's Q4 numbers 'were very good across the board': Santosh Rao

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Santosh Rao, Manhattan Venture Partners Head of Research, joined Yahoo Finance Live to discuss Facebook's Q4 earnings report.

Video Transcript

SEANA SMITH: Facebook earnings out just moments ago, beating on earnings per share and revenue. But the stock coming under pressure here after hours. Facebook warning about some headwinds facing the company this year. For more on this, we want to bring in Santosh Rao. He's the head of research at Manhattan Venture Partners.

And Santosh, we have the stock price up on the screen right now, with shares off just around 1 and 1/2%. Yet when you look at the EPS number and the revenue number, it actually looks pretty good. Wall Street's disappointed in these results. Are you disappointed in the numbers that we just got?

SANTOSH RAO: No, I think the fourth quarter numbers were very good across the board. I think that's not an issue. And that was not going to be an issue. The market expected a good quarter. I think it's all about the guidance and looking ahead. There are some issues that, don't forget, Facebook has been the worst in terms of negative investor sentiment amongst all of the FAANG. So that was layered on. That was there already.

And then, you have this caution from the company. So that's kind of adding to the fear factor. But I think overall, I think it's OK. I think the company, there are some headwinds. We knew about the ad targeting and a few other issues. But at the end of the day, advertising is the chunk of the majority of the revenues.

And that's doing very well. It's expected to have some slowdown, but not really. It's not going to get derailed as such. There's going to be some maybe caution there. But overall, I think 2021 is well-positioned, I think. So I don't think I would be worried. I would look-- see this as a good opportunity to enter if you wanted to.

ADAM SHAPIRO: Well, that warning that, you know, we got from the commentary is ambiguous. We quote, "We continue to face significant uncertainty as we manage through a number of crosscurrents in 2021." One of those currents is Congress. And it's going to take a long time, but that's a very serious concern, isn't it?

SANTOSH RAO: Don't forget, this overhang has been there for a long time. And every time after every earnings report, the stock sells off a bit, and then the market regroups. I mean, this is a juggernaut, I mean, if you had not noticed already. So they will ride through this. Yes, there are headwinds. But I don't think-- they're not going to be broken up. Instagram is not going to be taken away. WhatsApp is not going to be taken away. There is enough competition in the social media space.

So that will not be an issue. The anti-trust issue I don't think is really a solid negative against them. So overall, I think they will ride it out. Yes, that negative commentary, that overhang is going to be there for a while. But I think if you look underneath the covers, it's still well-positioned in a market that's-- they have a strong moat around their business. And they can withstand this.

SEANA SMITH: It certainly seems like it so far. We've been talking about these political and regulatory challenges. And Facebook has-- I think you can fairly say-- really weathered a lot of those concerns so far. But going forward, though, if they don't take the appropriate steps to address some of these issues, and we certainly have seen a lot of backlash against some of these companies over the last several weeks, is there any concern, or at what point are you worried about maybe that could possibly start affecting ad revenue?

SANTOSH RAO: Yes, I think they have to really say the right things and do the right things. They have to listen to what's going on, listen to the regulators, and just kind of let the regulators know, let the legislators know that they're playing by the rules. They're not doing anything that's beyond the pail. So I think that's the main thing. They just have to stay the course, say the right things, and do the right things at this point.

And they are. They're saying the right things. I mean, this political-- this whole atmosphere was so fired up, and you couldn't escape that. So you got hit from one way or the other. But I think they managed it very well in the end. And you'll see that. I mean, every political season, they get hit from every side. They just can't please everybody. But I think as long as they stay the course, they do the right things, I think they'll be OK.

ADAM SHAPIRO: And when they say in the report, they talk about stable or modest acceleration for revenue growth in the first and second quarters of the year, but then, was this, like, either setting expectations lower, or are they a runner who's on too much speed? In the second half of the year, we will lap periods of increasingly strong growth, which will significantly pressure year over year growth rates.

SANTOSH RAO: Yeah, and you have easy comps in the first two quarters because when the pandemic hit and all of that, there was some hit to the numbers in the first two quarters of 2020. So you have easier comps in 2021. So the first two quarters, they said, are going to be better. And the second quarter, the second half of the year, there's going to be some pressure.

They're not saying that things are going to fall off the cliff. They're just saying that there's going to be pressure. And I don't think even they know how things are going to play out overall. But they're being cautious. They don't want to know-- they don't want to go ahead of themselves overall. But I think net-net, with the majority of the businesses under them, about 10 million paying advertisers on their-- in their books, rather. So they have a strong presence in the market. And I don't think they're going away. And they can manage that.

SEANA SMITH: Santosh, what's the one thing you want to hear from Mark Zuckerberg in the earnings call that's expected to get underway later this hour?

SANTOSH RAO: Yeah, I think the biggest thing is how is the-- what's the regulatory headwind like? What is he planning to do? How is he addressing all of these antitrust issues? And then, overall, how is he addressing the-- how is he going to tackle the targeting issue with Apple ad targeting? So what is their strategy to tackle that? So I think those are the two big issues that overhang the stock. And I want to see what he has to say on that.

SEANA SMITH: OK, Santosh Rao, head of research at Manhattan Venture Partners, always great to speak with you.