Please ensure Javascript is enabled for purposes of website accessibility

Facebook, Inc. Earnings Will Bring Revenue Growth Into Focus

By Daniel Sparks – Nov 1, 2016 at 12:16PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Here's why investors may want to check in on Facebook's revenue growth when the social network reports third-quarter results.

In recent quarters, Facebook (META 1.97%) has absolutely crushed it when it comes to growing its top line. But there's good reason this growth won't last. Indeed, the deceleration may have already started -- investors will find out whether or not the growth rate is contracting when the social network reports quarterly results on Wednesday, Nov. 2, after market close.

Facebook CEO Mark Zuckerberg. Image source: Facebook.

Facebook's monstrous growth isn't sustainable

One reason Facebook's revenue growth is likely to decelerate soon is because recent astronomical growth rates are unsustainable. Facebook's $6.4 billion in second-quarter revenue, for instance, was up an incredible 59% compared to the year-ago quarter. This growth was driven by a 63% jump in Facebook's advertising revenue, which accounts for 97% of Facebook's total revenue.

For comparison, Aphabet's (GOOG 2.65%) (GOOGL 2.81%) Google revenue, which is driven primarily by digital advertising revenue, increased a more modest (but still solid) 20% in the company's most recent quarter. Sure, Google's $22.3 billion in quarterly revenue during the most recently reported quarter dwarfs Facebook's top line. But as Facebook's business continues to grow, the social network's growth rate for its advertising revenue will inevitably begin to decelerate toward levels closer to Google's.

Further, Facebook hasn't demonstrated a sustained period of growth at this level. Indeed, as recently as Facebook's second quarter of 2015, year-over-year revenue growth was meaningfully lower, at 39%. Therefore, with lower revenue growth than Facebook's 59% year-over-year third quarter occurring so recently, it's wise for investors to model for deceleration.

FB Revenue (Quarterly YoY Growth) Chart

FB Revenue (Quarterly YoY Growth) data by YCharts

Management has warned of a coming deceleration

Perhaps the most obvious reason to expect Facebook's revenue growth to decelerate in the coming quarters is because management has essentially warned that this is exactly what is going to happen.

In Facebook's second-quarter earnings call, for instance, Facebook CFO David Wehner said tough year-over-year comparisons, beginning in the third quarter of 2016, will drive "lower advertising revenue growth rates in each successive quarter in 2016." While Wehner admitted the "main drivers" for advertising growth will still be catalysts in 2016, tough year-ago comparisons will simply make sustaining the 59% year-over-year revenue growth achieved in Q2 difficult.

And beyond Facebooks' third quarter, investors should expect revenue to continue to decelerate, according to Facebook management. Wehner explicitly warned a key driver for Facebook's advertising revenue -- ad load -- won't be as big of a catalyst in the future.

Additionally, we anticipate ad load on Facebook will continue to grow modestly over the next 12- months and then will be a less significant factor driving revenue growth after mid-2017. Since ad load has been one of the important factors in our recent strong period of revenue growth, we expect our ability to grow revenue will be impacted accordingly.

For Facebook's third quarter, analysts seem to be taking management's warning into account. On average, analysts are expecting revenue to increase by about 54%, down from Facebook's 59% growth in Q3. But this is still a notably optimistic outlook considering just two quarters ago Facebook's year-over-year revenue growth was lower, at 52%.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Daniel Sparks owns shares of Facebook. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Facebook. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.