Exactly a year ago, during Facebook Inc’s (NASDAQ:FB) second-quarter earnings call, CFO David Wehner spooked FB stock investors when he said that ad load would be a “less significant factor driving revenue” starting in mid-2017. FB stock had a brief reaction, then went into a fairly narrow trading range for the remainder of the year.
Now here we are on the precipice of Facebook’s great advertising reduction, and any initial concerns have been stamped out. FB stock has added about 38% in the last 12 months.
This week’s second-quarter earnings beat helped, as the social media giant grew profits by 71% while its sales growth doubled rival Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG). However, the company again warned that the impending reduction of the number of ads it crams into your Facebook news feed could impact sales growth going forward. Judging by the 3% bump FB stock got the day after its latest cryptic reference to its declining ad load, Wall Street doesn’t seem worried.
Why aren’t investors more concerned? There are several reasons.
Instagram, WhatsApp Take Center Stage
For starters, Facebook simply can shift some of those “lost” news feed ads to WhatsApp (1 billion daily users) and Instagram (700 million users), neither of which have been monetized and both of which are growing faster than Facebook itself. And even while the company scales back on the quantity, it’s attempting to improve the quality (i.e. return on investment) of those ads via better brands, higher pricing, and ads more catered to the individual user thanks to artificial intelligence.
Meanwhile, the company is ramping up its video presence, building more data centers to handle the surge in video traffic and bandwidth. Ads packed into those videos should also help fill the news feed ad-load void.
Mark Zuckerberg and his minions are sand-bagging a bit when they warn of the coming ad load cliff, and understandably so. They’re trying to limit expectations in case all the initiatives mentioned above aren’t enough and overall sales take a big step back in the coming quarters. But investors aren’t buying it. Analysts, in fact, expect Facebook to continue growing unimpeded, estimating 39% sales growth in the current quarter and 41% for the year.
Granted, if accurate, those projections would make for Facebook’s slowest revenue growth since 2012. But again — those estimates are based on Facebook’s own conservative guidance.
And Facebook stock is cheaper than it has been since April on a forward price-to-earnings basis, has traded above its 50-day moving average virtually all year, and is up 50% so far in 2017.
That type of momentum tends to last longer than Wall Street Chicken Littles might expect, especially in a bull market.
Above all, FB stock has so much clout these days that seemingly grave concerns about declining ad loads become little more than annoying speed bumps. At this point, the concern are not enough to slow FB stock — not when the company is doubling its biggest rival’s sales growth.
Party Not Over for FB Stock
FB stock is one of Wall Street’s biggest parties these days, and the company’s warnings of decreased ad loads are like the angry neighbor telling investors to “turn the music down.”
If the warnings prove warranted, there could be a hangover for FB investors after the next earnings cycle. But for now, the drinks are flowing and the music remains cranked up to full blast.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
