Facebook Set to Open at All-Time Highs, but the Euphoria May be Overdone

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July 28, 2016 7:42am Nasdaq:FB

facebook-fb-logoFacebook Inc (NASDAQ:FB) shares will open at all-time highs this morning following yesterday’s blowout earnings report, but future revenue growth expectations could soon fall under scrutiny.


To be clear, there’s nothing wrong with Facebook’s latest earnings report. In fact, the results were stellar.

It’s just that expectations may need to come back down to earth a bit.

You see, Facebook relies on advertising — the vast majority of it within its mobile apps — for all of its revenue. That revenue has been surging over the past several years, as the company finds new ways to pack more ads into users’ timelines.

But we’re likely entering a period of peak “ad load.” That’s the term FB uses to describe the amount of ads it shoehorns onto its pages. CFO Dave Wehner noted yesterday that “Ad load is definitely up from where we were a few years ago. It’s been an important driver of inventory growth.”

Continuing, “The optimal ad load is really a mix of art and science. We also want to be thoughtful about making sure each person’s overall feed experience has the right balance of organic and ad content.”

That clearly means that Facebook can no longer grow its revenue by simply adding more ads. To do so would be risking user experience, which FB has always placed uber alles.

So to increase revenue from here on out, Facebook will have to look elsewhere. It could grow its user base, which is increasingly difficult, given that just about everyone in the world who wants to be on Facebook already is (it should be noted that Facebook’s audience is growing, but at a declining rate). The company could also charge more for ads, but that requires demonstrating to advertisers that pricier placements or units are actually worth the markup.

Finally, FB can continue to grow its Audience Network, which is a third party ad sales service that sells ads for other app makers within their own apps. That division reportedly has a $1 billion run rate, which would certainly be accretive to earnings over the next months and years.

So even though Facebook has probably hit peak ad load, it has other ways to grow. Whether that growth will match expectations, however, is another story — and that could dramatically affect its ballooning share price.

FB-2016-07-28

FB shares rose $6.06 (+4.91%) in premarket trading to $129.40.


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