Markets dislike uncertainty. That certainly holds when it's introduced to the outlook for a company whose shares have risen over 400% since mid-2013.
Thus the uncertainty created by earnings call remarks from Facebook (FB) CFO Dave Wehner about his company's 2017 performance led shares to drop 7% in after-hours trading on Wednesday, and open with a 4.7% decline on Thursday. But there are good reasons to avoid panicking.
Facebook was nearly unchanged going into its Wednesday call, after having beaten third-quarter estimates against a backdrop of high expectations. Adjusted EPS of $1.09 (up 91% annually) topped a $0.97 consensus with the help of slower spending growth -- total expenses rose 28%, down from Q2's 33% clip -- and a relatively low 25% tax rate. Revenue of $7.01 billion (up 56%) topped a $6.92 billion consensus thanks to a 59% increase in ad revenue to $6.82 billion.
But shares quickly went south after Wehner forecast Facebook's ad sales growth will "come down meaningfully" next year, as increases in the frequency at which ads are shown on Facebook's news feed (ad load) become "a less significant factor driving revenue growth after mid-2017." The ad load remarks are similar to ones made on Facebook's Q2 call.
Wehner also said 2017 would be "an aggressive investment year," with Facebook spending heavily on both talent and (due to its data center buildout) capital expenditures. This will follow a 2016 in which adjusted costs and expenses are expected to grow 40% to 45% (down slightly from a prior forecast of 45% to 50% growth).
It's worth pointing out that analysts already expected Facebook's growth to slow in 2017--while the company still has some big growth levers that are partly or fully untapped, it's unrealistic for a firm of Facebook's size to keep growing at a 50%-plus clip for a long time. Especially when it can't significantly increase ad load for its core service anymore without potentially alienating users. Going into earnings, analysts on average expected Facebook to post 2017 sales growth of 35.1%, well below the 51.6% growth they forecast for 2016.
Moreover, as Facebook stressed, ad load increases have only been one of the factors behind its recent eye-popping growth. User growth has also helped--daily active users (DAUs) and monthly active users (MAUs) respectively grew 17% and 16% annually in Q3, to 1.18 billion and 1.79 billion--as is continued growth in time spent per DAU.
In addition, higher click rates appear to be lifting sales of those ads for which Facebook is paid based on how often users click (rather than how often they're seen). Ad services firm Nanigans recently reported the click-through rate for its clients' Facebook ads rose 74% annually in Q3. And Facebook's PC ad sales, which had been limited growth as traffic continue shifting to mobile, rose 18% in Q3 thanks to the company's efforts to thwart ad blockers.
Then there are ad prices, which rose 6% in Q3 and could see stronger growth in 2017 as declining ad load growth limits the amount of new inventory provided to advertisers who are still clearly very enthusiastic about spending on Facebook. Prices should also benefit from Facebook's nonstop efforts--backed by the massive amounts of user data it has--to improve ad targeting and measurement, and the adoption of more immersive formats such as video ads and Canvas Ads.
Instagram, now claiming over 500 million MAUs and previously forecast by Credit Suisse to produce $3.2 billion in 2016 revenue, should also be a growth driver next year. So should Facebook's mobile ad network (the Audience Network), which has seen strong uptake thanks to its ability to use Facebook data to deliver targeted ads within third-party apps.
Facebook Messenger and WhatsApp, each of which has over 1 billion MAUs, are still largely in the pre-monetization stage. Mark Zuckerberg suggested on the call that Facebook's near-term focus for both messaging platforms is getting users to organically interact with businesses and public entities. Once it has succeeded on this front, Facebook will begin providing tools (such as ads) that help businesses "reach more people," as it's doing on core Facebook and Instagram.
Zuckerberg also hinted that enabling transactions would be a big part of Facebook's plans for its messaging apps. While one can't count on Messenger or WhatsApp to be major 2017 revenue contributors at this point, their long-term value needs to be factored into any projections on Facebook's growth potential.
Facebook has a long history of being conservative with its forward commentary, and it looks as if its Q3 call was no different. The company's ad sales growth could very well see a "meaningful" slowdown next year, but that still might not prevent it from posting revenue growth, in 2017 and subsequent years, that's also quite meaningful.
In which case, the company's sharp post-earnings selloff could look quite excessive in hindsight.