Facebook Inc (NASDAQ:FB) has built an empire on ads — lots of ads. As its advertising dollars have grown, FB stock has prospered.
But now that Mark Zuckerberg and company are on the brink of scaling their ad load back significantly, will Facebook stock suffer?
After years of increasing its ad load at breakneck speed, Facebook plans to rein them in the second half of this year, according to Chief Financial Officer David Wehner. FB is currently the second-most prolific publisher of ads in the world, behind Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), according to eMarketer. But the company has increased its ad load so much that the site has actually reached its advertising capacity.
FB Stock Tied to Ad Growth?
When you consider that advertising growth and user growth are the engines that have fueled Facebook’s sales boom, a conscious reduction in one of those areas seems troubling. How will FB replace that lost revenue?
For starters, it has yet to monetize recent acquisitions WhatsApp and Oculus, which would help fill the void. And the company still has more than $23 billion of cash in its coffers should it decide to buy out another social media or virtual reality company to give the bottom line an extra boost. Plus, Instagram is just starting to make money, and advertising on the photo-sharing platform are still relatively fresh.
Besides, there are downsides to all the extra ads. To some users, the sheer number of ads on their Facebook page or Instagram feed might be a turnoff, especially now that mobile accounts for more than 85% of the company’s total ad revenue. User growth is a big reason why FB is still growing like a startup after all these years, and I’m sure it won’t hurt that growth if new users see a few less ads when they sign up.
Regardless, you can bet Facebook has a plan to replace all the lost ads. Meanwhile, the company continues to make money hand over foot: The company blew past analyst expectations in the first quarter, growing ad revenue by 51% year-over-year and adding 80 million monthly users. On a GAAP basis, earnings-per-share grew 71%. Few, if any, well-established blue-chip companies can match that growth.
Wall Street Not Worried About Facebook Stock
Bottom line: even with fewer ads, the company will be just find — and so will Facebook stock. FB is still up 31% in 2017 even after stubbing its toe last week. It still trades at a mere 25 times forward earnings estimates, which is quite low for a big tech company with that kind of growth. While no stock continues to rise in perpetuity, FB stock should sustain for quite some time.
If you own Facebook stock, it’s not worth selling out of your position for fear of the impending advertising reduction. Wall Street isn’t panicking, as evidenced by the huge run-up in the stock of late. When in doubt, always trust the chart. And these days, there are few public companies you can rely on more than Facebook.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
