Topic of misinformation will 'remain front and center' for Facebook: Analyst

Facebook’s oversight board has upheld Trump’s ban. Wedbush Securities Equity Research VP Ygal Arounian joins Yahoo Finance Live to discuss.

Video transcript

AKIKO FUJITA: Let's bring in our first guest for the hour. We've got Ygal Arounian, Wedbush Securities Equity Research VP. Ygal, let me just get you to sort of weigh in on this decision. First of all, what does this mean for Facebook really at the end of the day, to have the board come back and say, we're going to uphold the ban, but you've got to come up with clearer rules here?

YGAL AROUNIAN: Hey, yeah. thanks for having me. Look, I think in terms of the financial implications in the near-term, you know, probably not super material. But this is a topic that's going to remain front and center for social media and for Facebook especially.

I think going through these motions is probably an important thing for Facebook. and coming to resolutions that are kind of standard and that they can follow going forward is going to be important, because I think this is a topic that's going to stick around for a long time on President Trump or others as we move forward.

ZACK GUZMAN: Yeah, because as much as it is kind of all about President Trump's accounts in regards to this decision here, the obvious looming factor is moderation and what Facebook wants to do on that front, and what kind of principles can be learned from this ruling. And when you look to that, I mean, obviously small potatoes, I think, when you think about maybe President Trump and his accounts, and kind of how much ad dollars might be tied to just that piece of the business. But when you broaden out and think about what Facebook is now facing politically when it comes to moderating content on its platform, is there anything that you'd look at this ruling and say, all right, this might be a sea change when it comes to how Facebook might be looking at things?

YGAL AROUNIAN: I'm not sure this ruling specifically is a sea change but, it is important for Facebook to get this right. They will-- if they're not getting this topic right over time, they're going to keep getting pressure on the regulatory front. And then you've seen them get pressure from the advertiser front as well. Sometimes those have been conflicting and coming at different directions, and that puts them in a little bit of a challenging spot too.

A lot of the advertisers have-- yeah, you've seen boycotts in the past just around content and hate speech. And then on the political side, it's come almost from the opposite direction. It's not-- it's really not an easy place to be in. But it is an important one. Content moderation or free speech on Facebook and other social media platforms is going to be critical. It's hard for them to please everyone, because there are views really all across the spectrum. It's really not an easy place to be in for them.

AKIKO FUJITA: On that front, when you think about the creation of this board, it was meant to be at least a response to both sides of the aisle who had concerns about how these decisions were actually being made in terms of what kind of content made it onto the platform. Does today's decision offer clarity in any way? And to the point you just made, is it going to quiet those who have been calling for further regulation?

YGAL AROUNIAN: I don't think it's going to quiet anybody. I think we're just going to see more of this. I mean, nothing really happened here. There was no decision really handed down other than them pushing it down the road with another six-month timeline. So I think-- I don't expect it to quiet anybody. I do expect this issue to remain kind of front and center over time.

ZACK GUZMAN: Let's shift over to another sector that is also kind of keeping an eye on regulations here after we got Labor Secretary Marty Walsh talking about drivers and contractors. Lyft reported earnings. And again, we saw beats here. Net sales $609 million, versus the $558 million estimate there.

And again, kind of Lyft pointing to third quarter adjusted EBITDA profitability-- that's kind of what they have been sticking with in terms of their timeline. But the big question mark, as I said, regulation around how they might have to classify drivers on the platform. What do you make of their quarter and maybe how investors are reacting to all those things that they're trying to calculate now?

YGAL AROUNIAN: Yeah, sure. So definitely a big regulatory day today across tech. Look, I think there's two issues going on with Lyft and rideshare right now. One is the fundamental story and the improvements in the business models, a, as we reopen and demand comes back, and then what Lyft has put into place around profitability. And they are much closer there, and they've done a really, really good job. And they should reach adjusted EBITDA profitability by the third quarter.

But we've seen the regulatory side play out in California for a while. Finally got settled, and now it seems to be creeping back up on a federal level. The challenge is going to be that that narrative can stick around for a little while, especially on the federal side, where you know, employment is more of a state issue. On the federal side, if there is going to be changes, it's going to come from legislation. That could take a long time to play out. So we're seeing that could kind of reemerge around these stories again.

AKIKO FUJITA: Another potential challenge for the company is being able to recruit more drivers as they continue to see demand pick up coming out of this pandemic. How significant a headwind do you think that is going to be for the company? And you know, are there potentials for additional incentives that will have to be dangled out there in order to be able to recruit to meet the demand they're seeing?

YGAL AROUNIAN: There likely will be more incentives. We've already seen that. I mean, I think it's a good problem for Lyft to have. They have too much demand. They can't meet it right now. So demand's surging again. Airport rides are up materially. Leisure travel is coming back. Business travel is not-- not there yet, but they're expecting it to come back. And there's not enough drivers to meet all that demand right now.

Lyft is giving a lot more driver incentives. At the same time, their revenue per ride is up quite materially, just because of the way their marketplace works, right? When there's a lot of demand, not enough supply, prices go up. So we are in an area of disequilibrium. I think management expects that to work-- work itself out over the next couple of months as more drivers come on.

The incentives should help. Stimulus will wane. And that should help a little bit. Unemployment benefits will go away. And then as drivers get vaccinated as well, we should see more drivers come back. So I think that's a problem that works itself out over time. And there's-- on either side, they kind of balance out. There's higher revenue, but also higher costs.

ZACK GUZMAN: Yeah, your team at Wedbush has an $85 price target, 12-month price target. When you look at catalysts here, I know that, you know, finally hitting their goal of adjusted EBITDA profitability in the third quarter would be good. It would obviously be very bad if they didn't hit it, since they've been talking about it for a while. But obviously, that overhang seems to weigh on whatever kind of catalyst there may be. So I mean, when you look at drivers to hit that price target here over the short-term, or I guess the year-term, what do you see as maybe the main one to watch there, considering a lot of people are expecting a strong bounceback in demand?

YGAL AROUNIAN: Yeah, that's the right question, because people do expect that at this point. I mean, if they did miss those targets, it certainly wouldn't be a good thing. But I think we're getting pretty close there. Even in 2Q, we're getting pretty close to breakeven profitability. They've sold off their autonomous unit. That's an extra $100 million of cost savings once that starts to flow through fully.

So I fully expect the cost sides to come in. I think there's a lot of upside in those expectations too. And then people are expecting demand to come back. But I think for-- you know, estimates have came down for so long, for the last five or six quarters.

I think at this point, you can see the demand rebound come in ahead of expectations, as we talked about airport coming back, leisure coming back. And then business travel should be a long tail contribution to that, because I think business travel is going to be a much more 2022 contributor to demand rebound than 2021, whereas leisure can kind of drive the boat here for now in the next couple of quarters.

ZACK GUZMAN: All right. Ygal Arounian, Wedbush Securities Equity Research Vice President. Appreciate you coming on here to chat. We'll see what happens there.