Here’s Why Facebook Investors Are Nervous, Despite Blockbuster Results

The gigantic advertising machine known as Facebook continued to fire on all cylinders in the most recent quarter, beating analysts’ revenue and profit estimates handily.

So then why did the company’s share price [fortune-stock symbol=”FB”] weaken by 2% in after-hours trading Wednesday, despite this dramatic over-performance? In a nutshell, investors are likely nervous about the future, after Facebook warned that its advertising revenue growth rate is likely to slow later this year, and its costs are likely to rise.

The social-networking giant’s stock has also climbed by more than 15% in just the past three months, driven in part by strong results, so some of the weakness could be profit-taking.

There was certainly nothing to complain about in Facebook’s posted numbers. Revenue in the first quarter climbed by 49% to $8 billion, which was higher than expected, and net income was $3 billion or $1.04 per share, significantly higher than consensus estimates of 87 cents.

The company also announced that it now has close to 2 billion monthly active users — 1.94 billion, to be exact — up from 1.86 billion in the prior quarter. It has 1.28 billion daily users.

A company that has annual revenues of almost $30 billion but is still growing at almost 50% per quarter is almost unheard of. But it also raises the possibility that this phenomenal growth will begin to slow down, and that’s likely what investors are spooked about.

Facebook said in its last quarterly update that it expects to see its advertising growth rate “come down meaningfully” in 2017, as it starts to throttle the amount of advertising in the news feed.

Over the past few years, the social network has been able to boost its revenues by increasing what it calls the “ad load,” or the proportion of ads in a user’s feed. But the company said it is reaching the upper limits of what it can put in the feed without seeing a backlash.

Growth looked to be humming along just fine in the most recent quarter: Ad revenue climbed by 51%, which is roughly equivalent to the growth that Facebook saw in the previous quarter.

However, company officials repeated their earlier warning, saying they expect ad revenue to “come down meaningfully” by the middle of the year, along with the ad load. In addition, Facebook also said that its costs are likely to increase by more than 50% in the next quarter, as it makes a number of investments in what it called “significant initiatives.”

Among those initiatives is a major investment in hiring moderators to police the site’s live videos and other content for offensive or disturbing material, after a number of high-profile incidents in which people have committed suicide and engaged in other acts of violence.

Facebook CEO Mark Zuckerberg announced Wednesday that the company is hiring 3,000 moderators who will review content, to add to the 4,500 or so it has doing that job currently.

Here are the key numbers from Facebook’s Q1:

Revenue: $8.03 billion vs. $7.83 billion expected.
Monthly active users: 1.94 billion, up from 1.86 billion last quarter.
Daily active users: 1.28 billion, up from 1.23 billion last quarter.

Facebook earnings: $1.04 per share vs 87 cents expected

Daily active users (DAUs) – DAUs were 1.28 billion on average for March 2017 , an increase of 18% year-over-year. • Monthly active users (MAUs) – MAUs were 1.94 billion as of March 31, 2017 , an increase of 17% year-over-year. • Mobile advertising revenue – Mobile advertising revenue represented approximately 85% of advertising revenue for the first quarter
of 2017 , up from approximately 82% of advertising revenue in the first quarter of 2016

1.3B a day, Mark says — talked about next focus is building community, lot to do, bigger than any one org, develop social infrastructure for engagement… millions of smaller communities… more than 100 million people members of important groups like parenting, meaningful groups — want more than a billion people to join these kinds of groups… launched fund-raising tools… continue building new tools to keep people safe, adding 3,000 people to add to 4,500 we have already, to review content… changes to the news feed to reduce financial motivation to spread hoaxes, more info on whether article is disputed, ways to tell whether something is fake news… launched Town Hall in March, created more than a million new connections with local representatives… swipe right to access the camera, computer vision tools for filters etc., make camera the first augmented reality device… excited to keep pushing augmented reality forward; 200M daily active Instagram Stories users, 175M daily users of WhatsApp “status” (like stories) will keep putting videos at the center of all these services (news feed, WhatsApp and Instagram); daily watch time has increased by four times… 1.2B people use Messenger every month;

Ad rate will come down meaningfully, ad load will come down mid-year, full year 2017 payments revenue will decline compared to 2016; GAAP expenses will grow 40% to 50%, initiatives that will be positive long-term for society and the company, expenditures will be up over 50%.

Looking to invest in “kickstarting an ecosystem for longer-form video”… revenue-share model…

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