November 3, 2016 by Paul Dughi
I can’t imagine any company in the world that wouldn’t be happy with these results. Revenue in the third quarter – which set a record last year – was up 56% this year. And it beat projections with 3Q revenue of $7.01 billion dollars vs. projections of $6.92 billion, Facebook reported in its earnings call.
Facebook reported 1.79 billion monthly active users, also larger than projected, on a net gain of 80 million monthly users.
“We had another good quarter. We’re making progress putting video first across our apps and executing our 10 year technology roadmap.” – Mark Zuckerberg, Facebook founder and CEO
With such a strong showing and earnings report, why would the stock price go down 8%?
So with such positive news, why are investors not rewarding Facebook? I’ll sum it up in one word: Mobile.
OK, so maybe it’s more than just mobile, but hear me out. FB’s generated $5.7 billion in mobile ads, representing some 84% of total ad revenue (up 6% from a year ago). Sounds good, but there are fewer ads on mobile and Facebook says it’s nearly full saturated – no more room to create more ads. And with the incredible growth of mobile, less desktop ads to make up the difference.
Facebook’s Chief Financial Officer, Dave Wehner, talked about that saturation point on the call. Seems there is a limit to the number of ads they can fit into mobile feeds. Wehner pointed out the FB’s growth track was fueled by advertising.
“Ad load has been one of the three primary factors fueling that growth. With a much smaller contribution from this important factor going forward, we expect to see ad revenue growth rates come down meaningfully.” – Facebook’s Chief Financial Officer, Dave Wehner
Wehner said ad load will play a “less significant role” driving revenue growth by the middle of next year.
It’s also about spending levels and earnings growth.
In addition, Facebook is continuing its spending spree. Wehner pledged an “aggressive spending” pattern in 2017, in areas such as recruiting and projects.
READ MORE: You can listen to the November 2nd earnings call here.
READ MORE: Watch the slide deck here.
Business Insider reports that the last time Facebook put out the warning about spending, it upped spending by 57% in 2015 – a larger increase than 2015’s 44% revenue growth.
Still, stock prices dropped 8% on November 2nd in after-hours trading.
Still, by any measure, Facebook is killing it. Brian Nowak, a Morgan Stanley analyst, famously told the NY Times that in the first quarter of 2016, about 85 cents of every new dollar spend in online advertising went to Google or Facebook. While Google’s 53% share is top, Facebook is second at 17%. Everybody else splits the rest. If you take the growth at Google and Facebook out of the equation, you can argue that overall digital spending is down.