Investors aren’t happy at all.
Facebook delivered killer earnings on Wednesday afternoon. Then it dropped a bomb.
Facebook, which has been riding a rocket ship in terms of revenue growth over the past three years, told investors that it expects that growth to slow “meaningfully” in 2017.
In other words, the rocket ship is slowing. Quickly.
The reason? Facebook says it has finally maximized ad loads — or the volume of ads that it can show each user before totally ruining their user experience. That means it can’t continue to grow revenue by simply increasing the number of ads it crams into your News Feed, which it has been able to do up until now.
“Over the past two years we have averaged about 50 percent revenue growth in advertising. Ad load has been one of the three primary factors fueling that growth,” CFO Dave Wehner said on Wednesday’s earnings call. “With a much smaller contribution from this factor going forward, we expect to see ad revenue growth rates come down meaningfully.”
A few sentences later he added this: “We anticipate 2017 will be an aggressive investment year.” Translation: Facebook plans to increase spending in 2017.
Boom. Those two tidbits sent Facebook stock down almost 9 percent in after-hours trading.
The ad load issue is not new. Facebook clearly stated last quarter that ad load was becoming a problem. But Wehner didn’t frame the problem quite as bluntly as he did Wednesday afternoon, instead calling it “a less significant factor” in Facebook’s future revenue growth. “We expect our ability to grow revenue to be impacted accordingly,” Wehner added at the time, which doesn’t sounds great, but sounds much more cheery than “future growth rates [will] come down meaningfully.”
— Jan Dawson (@jandawson) November 2, 2016
All is not lost, of course. Facebook is still growing its user base impressively — it added almost 80 million new users last quarter and has 1.79 billion in total. That’s a lot of eyeballs to monetize, and the easiest way to offset the issues that come with ad load capacity. It operates one of the world’s largest mobile ad businesses, which is where marketers want to spend their money.
Plus, Facebook owns one other emerging business — Instagram, which some believe will be a $5 billion ad business someday. Facebook also owns Messenger and Oculus, two other unproven, but potentially big, businesses down the line.
But that’s just potential. What we know now is that ad load looks like a problem. And that’s not a good sign.