Facebook Profit Soars, but Growth Concerns Emerge - Wall Street Journal
Facebook Inc., now on pace to reach $27 billion in revenue this year, is defying the slowdown in growth that usually comes with increasing size.
The social media giant said Wednesday that third-quarter revenue soared 56% to $7 billion and its quarterly profit nearly tripled to $2.38 billion, as it reaps the spoils of its dominance in mobile advertising.
Facebook’s top-line growth rate is double any other U.S. company with revenue of $20 billion or more, excluding those growing through acquisitions, according to data from Standard & Poor’s Capital IQ.
Yet Facebook said that it can’t maintain its current pace. Starting in the middle of next year, Facebook will stop showing users more ads in their news feed, the tactic it has been using to juice revenue growth for the past two years, the company said Wednesday. As a result, advertising growth will “come down meaningfully,” Chief Financial Officer Dave Wehner said during a call with analysts.
Facebook now expects a “much smaller contribution from this important factor going forward,” he said. He added that Facebook expects to power growth by adding more users and boosting the amount of time they spend on the social network. Video is key to that strategy.
“The growth rate has to be slower; it’s a law of large numbers, if nothing else,” Pivotal Research analyst Brian Wieser said. “Nobody was expecting the company to grow at the same rate.”
Facebook’s stock price was down more than 7% in after-hours trading because of the caution about advertising growth. Facebook also plans to spend more on data centers and hiring engineers next year.
Facebook’s growth outstrips its only rival in online advertising, Google parent Alphabet Inc., which last week said quarterly revenue grew 20%.
Facebook and Google together garnered 68% of spending on U.S. online advertising in the second quarter—accounting for all the growth, Mr. Wieser said. When excluding those two companies, revenue generated by other players in the U.S. digital ad market shrank 5%, according to his estimates.
“What should be a concern for everyone is the dominance of just two companies, Google and Facebook, who are capturing all of the growth in the ad marketplace,” said Jason Kint, chief executive at Digital Content Next, a trade organization that represents digital publishers such as Condé Nast, Business Insider, the Washington Post and Wall Street Journal owner News Corp. “No one is able to collect data on the scale they can.”
Mobile accounts for nearly half of all the advertising purchased online in the first half of 2016, according to the Interactive Advertising Bureau, and mobile ads recorded the fastest growth of any category compared with the first six months of 2015.
As Facebook turned its focus to its mobile app in 2012, it tapped into a huge market of businesses eager to reach consumers. Mobile advertising made up 84% of Facebook’s advertising revenue in the third quarter, an acceleration from the previous year.
“People are moving to mobile and marketers know that,” Sheryl Sandberg, Facebook’s chief operating officer, said in an interview. In the past year, Facebook added 270 million new mobile users who log in at least once a month. Of its 1.79 billion monthly users across all platforms, 93% are on mobile.
Facebook makes money by slotting ads into the news feed, the main scroll of pictures, videos and posts. But putting too many ads in the news feed could turn off users. Executives have said they are seeking “the right balance” of ads and other content in the news feed.
Video could provide the next avenue for growth. Chief Executive Mark Zuckerberg said that Facebook would evolve into a “video-first” company by making video core to each of its apps. Executives predict that within five years, most of what people consume online will be video.
Adding more video to Facebook’s news feed could boost the amount of time users spend on the site. That, in turn, could give Facebook the opportunity to sell more lucrative video ads and potentially divert dollars from what advertisers currently spend on television ads. TV ads are a roughly $70 billion market in the U.S., according to eMarketer.
Facebook and Google have made a strong case that their audiences and ad products are competitive with television advertising in their ability to sell products, said Donald Williams, chief digital officer at the ad buying firm Horizon Media. “They’ve been trying to appeal to brand marketers and they’re getting better at it all the time.”
—Mike Shields contributed to this article.
Write to Deepa Seetharaman at Deepa.Seetharaman@wsj.com
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