Social media siteâ€™s revenues could be peaking
November 3, 2016: Facebook has benevolently decided to improve its user experience next year by limiting the ads on its appâ€™s news feed. Lots of likes to come from users, not so many from shareholders. Facebookâ€™s revenue growth may well suffer but the shift makes sense.
The social media group announced another blowout quarter on Wednesday with monthly active users jumping to nearly 1.8bn and revenue soaring 56 per cent. In the conference call afterwards, however, management said its growth in â€œad loadâ€ â€” how many marketing messages it stuffs on to its pages â€” will fall next year. Revenue growth will decelerate as a result. That news, along with promises to expand capital investment and research and development spend, spooked shareholders. Facebook dropped 7 per cent in late trading.
Its ominous forecast aside â€” chief executive Mark Zuckerberg said the ad change would mean its run rate of 50 per cent growth in revenue would end next year â€” one wonders from where the next wave of ad revenue could originate. Possibilities include its popular mobile video features, virtual reality products and its Facebook pages aimed at small businesses. Capital expenditures for the year so far were up more than 76 per cent to $3.2bn. Facebook has eight times that in cash on its balance sheet.
The shares have soared 68 per cent this year. For good reason: operating margins have climbed to a high of 45 per cent. Facebookâ€™s dominance is underscored by the carnage in newspaper print advertising, not to mention the AT&T/Time Warner deal. Those two companies hope to create an ad revenue vehicle to challenge Facebook. But by opting to spend its war chest on new projects, Mr Zuckerberg is clearly focused on the threat that the Apple, Amazon and Google ecosystems represent. Facebook realises it had better take its chances from a position of strength, something users and investors should both appreciate.