SAN FRANCISCO - First, Facebook delivered the good news.
Fueled by its mighty mobile advertising business, the social media giant crushed Wall Street forecasts, topping analyst expectations for earnings and revenue for the sixth straight quarter.
Then Facebook dropped a bombshell on investors: Advertising revenue growth would "come down meaningfully" next year as Facebook reduces its "ad load," the number of ads it shows users in their News Feed. Facebook shares (FB) plunged 8% to $117.50 after hours. They had risen nearly 30% in the past year.
Facebook has averaged about 50% revenue growth in advertising. Increasing the ad load had been one of three major drivers, along with user growth and increased time spent on the social-media service.
"Ad load will play a less significant factor driving revenue growth after mid-2017," Facebook's chief financial officer David Wehner said during a conference call with analysts.
Wehner also warned that company spending would accelerate in 2017. "We anticipate 2017 will be an aggressive investment year," both in terms of adding more employees and expanding data centers, he said.
"Facebook is signaling that one of the major drivers of growth is going to slow significantly," said Jan Dawson, chief analyst with Jackdaw Research. User and engagement growth are strong, but ad sales growth is cooling, and ads make up over 95% of revenue, he said.
Wehner said Facebook has other levers it can pull to increase revenue, such as increasing the time users spend on the platform.
"The market’s reaction in the after-market during the earnings call to management commentary regarding reduced ad load increases and decelerating revenue growth during 2017 was unnecessarily negative in our view," Pivotal Research Group analyst Brian Wieser said in a research note. "We note that consensus estimates and our own already anticipated this trend."
Still, the warning put a significant damper on Facebook's estimates-topping third quarter.
Net income tripled to $2.38 billion from $896 million a year earlier. Excluding certain expenses, Facebook reported earnings per share of $1.09, up from 57 cents a year earlier. Analysts had expected a profit of 97 cents.
Revenue rose 56% to $7.01 billion in the third quarter, beating estimates of $6.9 billion. Facebook has increased sales by more than 50% the past four quarters.
50%-plus sales growth
Facebook, a digital advertising juggernaut that trails only Google, "just has so much momentum," said eMarketer analyst Debra Aho Williamson.
"Increasingly these two companies are the ones that are controlling digital advertising and, not only that, they are becoming major players in all of advertising," Williamson said.
Mobile advertising revenue represented about 84% of total advertising revenue in the quarter, unchanged from the second quarter. Until the third quarter, the percentage of Facebook ad revenue that comes from mobile had increased every quarter since the company began reporting the figure in 2012.
"Facebook has played a huge role in making mobile advertising what it is today and pushing advertisers to think mobile when comes to advertising strategies," Williamson said.
Perhaps most impressive, said Wedbush Securities analyst Michael Pachter, was sequential revenue growth of $606 million, or just slightly less than Twitter’s overall third-quarter revenue.
In other words, "they grew by a Twitter," Pachter said. "Amazing company."
Facebook reported third-quarter earnings on Wednesday after the markets closed. Facebook shares closed down 2% to $127.17 in regular trading.
The number of people who log into Facebook at least once a month increased 16% year over year to 1.79 billion. Over the past year, Facebook has added 243 million monthly active users, nearly the size of all of Twitter, which has 317 million people who use the social-media service at least once a month.
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