Don’t worry about Facebook’s revenue growth. Be happy
Facebook has warned for months that its runaway train of revenue growth is running out of steam. The company showed on Wednesday that it is laying new track as fast as it can.
Facebook continues to be one of the fastest growing and most profitable tech companies in the world. Revenue rose 45% in the second quarter, the company said on Wednesday. That’s nowhere near the incredible pace of growth that started in late 2015, but it’s hard to complain about a company of Facebook’s size growing “only” 47% in the last six months with 45% operating profit margins.
The big worry is what happens to sales growth in coming months. Facebook reiterated its warnings on Wednesday that its revenue will increase more slowly because it can no longer keep ratcheting up the number of advertisements in the social network’s news feed. That increase in ads has significantly contributed to Facebook’s booming sales, although it’s noteworthy that no one knows exactly by how much.
Executives also added new warnings that it can’t stick as many ads in video, and that new efforts to make money from Facebook’s messaging apps won’t offset the changes it makes in the ratio of ads.
All these caution flags make Facebook investors antsy about the future. I get it. But I want to draw your attention to one number that shows calm should prevail for now: 24%. That’s the increase in the cost of Facebook ads in the second quarter compared with the one a year ago. This figure shows companies remain eager to advertise their products and services to Facebook’s gigantic audience.
It is a sign that Facebook’s revenue growth should be sustainable even as it stops cramming more ads in the news feed. (Facebook said the number of ads it showed to users grew only 19%, which is a stunning slowdown in growth.)
One number doesn’t wipe away all investor anxiety about Facebook, of course. The fact remains that it is under pressure to find the next big sources of sales growth, and it has many lines in the water to find them.
Facebook has overhauled its Instagram service over 2016 to make it more appealing to users and advertisers. Facebook’s two chat apps, Messenger and WhatsApp, are next in line for attention from the money-making wizards at Facebook.
Chief executive Mark Zuckerberg told stock analysts on Wednesday that he wants to “move a little faster” to generate revenue from Messenger and WhatsApp. That’s code for expect way more ads, fast. The company also is trying to become more like television to steal a piece of the nearly $200 billion spent each year on TV commercials. These are all promising sources of growth, but Facebook could fail to reach its potential. Video will be a particularly tricky next act for Facebook.
Investors are justified to expect near-perfect execution from Facebook’s revenue fishing expeditions. Its stock has run up more than 40% in 2017 so far. That has pushed its valuation to about 16 times the average of expected earnings before interest, taxes, depreciation and amortization for the next 12 months, Bloomberg data show. That is far more expensive than Google parent company Alphabet Inc, although a premium is justified for Facebook’s quicker pace of growth.
Like Google, Facebook will continue to face doubts that its good times can last. But both companies have demonstrated that they are adept at finding new ways to sell more ads to companies that are eager to pitch to their loyal users.
And by telegraphing its growth slowdown far in advance, Facebook is skillfully trying to manage Wall Street’s expectations. So don’t worry (too much). Let the Facebook enthusiasm wash over you. Bloomberg