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Why Facebook, Inc.'s Revenue Growth Is About to Slow Down

By Daniel Sparks - Updated Apr 12, 2017 at 1:11PM

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Facebook's first quarter could be marked by decelerating revenue growth -- and this deceleration may get steeper as the year goes on.

Facebook (FB 1.18%) management has warned investors on several occasions that it can't keep up the 54% year-over-year revenue growth it served investors in 2016. Ahead of the company's first-quarter earnings release, it's a good time to revisit management's forecast for decelerating growth.

What management is saying

For Facebook's first quarter of 2017, analysts are still expecting rapid revenue growth. On average, analysts are forecasting first-quarter revenue of about $7.8 billion, up about 45% year over year. But this growth would still be a deceleration compared to both Facebook's full-year revenue growth of 54% in 2016, and even compared to the company's 51% year-over-year revenue growth in the fourth quarter of 2016.

Notifications in the Facebook app

Image source: Getty Images.

This decelerating revenue growth is happening just as management said it would -- and, the company says, will likely continue as the year goes on.

There are two primary reasons for Facebook's decelerating revenue trend.

First, Facebook is now lapping some very strong periods of year-over-year growth, particularly beginning in the fourth quarter of 2015. In Facebook's most recent quarter, the company was up against 57% year-over-year growth in the fourth quarter of 2015 -- a much tougher comparison than the 41% year-over-year growth Facebook was up against in the third quarter of 2016.

FB Revenue (Quarterly YoY Growth) Chart

FB Revenue (Quarterly YoY Growth) data by YCharts.

Second, management believes year-over-year increases in ad load are about to taper off, causing Facebook to lose one of its key revenue growth drivers. Facebook CFO David Wehner detailed this forecast in the company's third-quarter earnings call last year:

[W]e continue to expect that ad load will play a less significant factor driving revenue growth after mid-2017. Over the past two years we have averaged about 50% revenue growth in advertising. Ad load has been one of the three primary factors fueling that growth. With a much smaller contribution from this important factor going forward, we expect to see ad revenue growth rates come down meaningfully.

While Wehner did say he didn't expect ad load to begin contributing less to revenue growth until the second half of 2017, Facebook is up against some tough year-ago comparisons in the first half of the year. Facebook's first- and second-quarter year-over-year revenue growth rates last year were 52% and 59%, respectively.

But there are still growth drivers

Of course, all of this doesn't mean Facebook's revenue growth rates are about to plummet. While meaningful deceleration throughout 2017 should be expected, I'm still anticipating Facebook's revenue for the full year to be up by 30% to 35%. Investors should keep in mind that ad load is only one of three of the company's key drivers fueling revenue growth, and Facebook management expects the other two drivers -- growth in active users and rising advertiser demand -- to persist.

Facebook CFO Wehner emphasized his optimistic outlook for these two growth drivers in the company's third-quarter earnings all last year, saying management expects them to "drive growth next year."

So, while Facebook's growth rates are about to come down, the social network undoubtedly remains a growth stock. However, the monstrous growth of Facebook's past isn't likely to resurface.

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