Facebook's business is being challenged by new privacy rules

Facebook’s mean, green ad targeting machine is expected to be increasingly impacted by new privacy regulations and tools that give users more control over their data.

“While we’ve experienced some modest impact from these headwinds to date, the majority of the impact lies in front of us,” David Wehner, Facebook’s chief financial officer, said during the company’s fourth-quarter earnings call on Wednesday.

Facebook said its future revenue growth is expected to “decelerate” compared to the fourth-quarter, when ad sales grew 25%. That represented Facebook’s slowest quarter of ad revenue growth in at least two years.

Facebook’s has been able to grow its massive business by offering advertisers the ability to target specific audiences among the 2.9 billion users of its family of apps. Facebook combines the data it collects about user activity on its service with data provided by third-parties to help categorize users and serve them with more targeted ads.

But as Facebook gives users more control over the data collected about them and complies with new global privacy regulations, targeting users with ads is becoming more challenging.

Facebook is already subject to Europe’s General Data Protection Regulation, a privacy law that went into effect in 2018, and the California Consumer Privacy Act, a similar but stricter state law implemented in January. But other states and individual countries are working on additional rules.

On top of that, big tech companies are starting to announce changes to their services that will allow users to take more control of their privacy. Google, for example, recently said it plans to phase out support in Chrome for third-party cookies, or software that tracks user behavior online, within two years. Facebook said such changes are also expected to weaken its ad targeting capabilities because it relies on cookies to track what users do outside of Facebook.

“There’s a lot of unknowns across the ad space as cookies increasingly go away,” said Ron Josey, analyst at JMP Securities. “It’s another risk we have to monitor.”

Meanwhile, Facebook also recently gave users more control over the data the company collects about them. For example, users can block Facebook from serving them ads based on what they do on its social network and based on data from third parties.

Regardless of the headwinds, analysts are mostly positive about Facebook’s financial future. Baird Equity Research analyst Colin Sebastian said there’s “no change to our positive thesis on Facebook,” crediting its stable number of monthly and daily users as well as fourth-quarter ad revenue that beat analyst expectations.

Josey, from JMP, said that advertisers still consider Facebook the best bang for their bucks, and that there are only few rivals that can compete with the company.

“We see user engagement going up still, and as long as that continues, we should see advertisers go up as well,” he said.

Facebook reported $70.7 billion in revenue for the year, up 27% from 2018. It also introduced a new metric that tracks the total amount of users across its family of apps. Facebook said it had 2.9 billion monthly users across its apps, 2.5 billion of which use Facebook’s core app.

Following its fourth-quarter earnings, which beat analysts’ estimates, Facebook’s stock fell 7% to $207 per share. The drop was likely driven by slowed revenue and a 51% increase in costs largely associated with legal fees and settlements as well as research and development.