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2 Growth Opportunities for Facebook

By Daniel Sparks - Nov 2, 2019 at 1:31PM

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Management discusses two key catalysts for the social network

Social network Facebook ( FB -1.14% ) crushed expectations when it reported its third-quarter results this week. Revenue growth accelerated, and earnings per share rose 20% year over year, even as full-time employees increased 28%. Then, of course, there was the social network's 9% year-over-year increase in daily active users.

But can Facebook keep up this momentum? While some deceleration should be expected, there are still plenty of reasons for investors to expect more meaningful growth in Q4 and beyond.

Here are two key drivers for Facebook's business that management discussed in the company's third-quarter earnings call.

A shopping tag within Instagram Stories

Image source: Instagram.

1. Stories ads are a "big driver" for Facebook

When asked about the monetization opportunities that Facebook is most excited about in 2020, CEO Mark Zuckerberg gave a nod to the company's stories format ad products. "Stories is obviously one of the big growing areas for us and continues to be a big driver," said Zuckerberg.

Facebook chief operating officer Sheryl Sandberg added that 3 million of the tech company's 7 million advertisers are now running Stories ads across Facebook, Instagram, and Messenger.

But Sandberg importantly emphasized that Stories ads still don't monetize at the same rate as its traditional News Feed ads. However, there's still reason for investors to be bullish on this ad format.

Providing further context on Stories ads, Facebook CFO Dave Wehner said that the key opportunity for the format is in ad-impression growth -- not price growth. In other words, Facebook expects Stories to drive revenue growth because of the growing frequency of this format. This can help offset some of Stories ads' lower monetization rate.

2. Messaging is a key e-commerce opportunity

Facebook has continued to bet big on private messaging in 2019. The company recently added a button for Stories ads that will take users straight to Messenger to initiate a conversation with a business. In addition, the social network has been testing WhatsApp Pay, a mobile payment capability for its WhatsApp messaging app in India.

"Messaging is one of the fastest-growing areas for online communication and especially between businesses and people," said Sandberg during the call. "We've seen businesses use Messenger to reach customers, generate new leads and even sell cars."

Expect slower growth

While these catalysts should help Facebook keep growing its business at double-digit rates, investors should expect the social network's growth to come down. During the company's third-quarter earnings call, management said it expects its revenue growth rate to decelerate from the 29% growth rate it achieved in Q3 to a rate in Q4 that's around 20% to 25%. "This deceleration is largely driven by the lapping of several successful product optimizations in Q4 of last year, as well as ad targeting related headwinds," Facebook CFO Dave Wehner explained.

But management is optimistic about 2020, noting that any further deceleration next year should be much more moderate.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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