Last week, social media titan Facebook Inc (NASDAQ:FB) released an outstanding third quarter earnings report but instead of the pop you might expect when a company reports both top- and bottom-line growth far beyond expectations, FB stock made its way lower, as investors focused on management’s 2018 guidance. More specifically, they were caught up on the fact that expenses are expected to rise significantly in the year to come.
What’s the Big Deal?
Worries about Facebook’s 2018 spending plans aren’t completely unfounded. Management said the upcoming year is set to be a “significant investment year,” with operating expenses increasing somewhere between 45% and 60% compared to 2017. Capital expenditures are also predicted to double in 2018. Even more concerning to traders is the fact that the budget hasn’t been finalized yet — so those figures could get even higher.
A Necessary Evil
The thing about FB’s decision to make 2018 an “investment year” is that it’s necessary and, therefore, I think the firm is making a good choice to be proactive rather than reactive. We’ve seen Facebook struggle to play catchup against Snap Inc. (NYSE:SNAP) this year, as it added several new features to its Instagram platform to mimic what users value on Snapchat. That strategy has been working to retain users and even rope in new ones — but it’s time FB truly focused on getting out in front.
The firm is planning to invest heavily in its “long-term initiatives around augmented and virtual reality, AI and connectivity,” all three of which are huge growth opportunities that will cement FB’s place in the future of the tech space.
Community Building
The other big spend that FB is facing in the upcoming year will be on safety and security. From my point of view, that’s a major pain-point for social media users right now and Facebook’s commitment to making sure its users are protected will provide tailwinds for FB stock in the future.
Right now, we’re seeing increased sensitivity among social media users who worry about “fake news” and inappropriate ad placement. Instead of glossing over the issue, FB CEO Mark Zuckerberg has been working to make Facebook as transparent as possible so that it can become a solution to the problem.
This will have lasting ramifications among users, because it positions FB in a favorable light and gives the site more clout. Not only will that attract and maintain users, but it will become more valuable to advertisers who will want to reach their customers on a trusted platform.
What About Ad Growth?
The other major concern for FB stock investors has been advertising growth. Facebook has reached its saturation point, where including more ads on users’ newsfeeds would become intrusive and counterproductive. The firm warned earlier this year that it was going to decrease ad load in the second half of the year and it did just that. However, despite that, the firm still saw its revenue increase an impressive 47% from the previous year. That should help assuage fears about slowing ad growth moving forward.
Not only that, but Facebook still has a few tricks up its sleeve when it comes to advertising revenue. Although we’ve seen no talk of monetizing WhatsApp messenger, that will eventually come as FB finds new ways to sell advertising space. The platform has become one of the most popular ways for people to communicate and Facebook will capitalize on that community eventually.
Then there’s Dynamic Ads, which the firm opened up to more business sectors in the third quarter, as well as its mobile advertising initiatives.
So, although Facebook is decreasing ad load, the company isn’t stagnating. The firm is working to increase advertising effectiveness rather than frequency and you can expect to see new ways to monetize its messaging communities cropping up in the quarters to come.
Bottom Line on FB Stock
The dip in the FB stock price was unfounded. Concerns about increased spending are only a problem if those expenses outpace revenue growth, which is an unlikely scenario.
Facebook needs an investment year to ensure its staying power in the future and to cement its dominance in the social media space. When the company posts its fourth quarter results and finalizes its 2018 budget, we’ll have better insight into how exactly FB is planning to spend — and investors won’t be quite as jittery.
Facebook is a great long-term opportunity and the firm’s commitment to its future goals prove that it’s a stock worth buying and holding on to.
As of this writing, Laura Hoy was long FB.
