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Facebook Warns of Slowing Growth

- By Sangara Narayanan

Facebook's (FB) stock price edged lower after the company released its third-quarter earnings report. Investor sentiment was dampened despite the company posting stellar numbers. The social media giant cautioned investors about growth rates slowing down in the future because it is possibly near the maximum ad load.



"I also wanted to provide some brief comments on 2017. First on revenue, as I mentioned last quarter, we continue to expect that ad load will play a less significant factor driving revenue growth after mid-2017.

Over the past few years, we have averaged about 50% revenue growth in advertising. Ad load has been one of the three primary factors fueling that growth. With a much smaller contribution from this important factor going forward, we expect to see ad revenue growth rates come down meaningfully." - David M. Wehner, Facebook chief financial officer during third-quarter earnings call



Wehner told investors that the company expects revenue growth rates will decline in the fourth quarter as the company had posted strong numbers during the fourth quarter last year. Although there are several moving parts within Facebook, such as Instagram and WhatsApp, its main platform has been the breadwinner for the family. Instagram has just started off the block, and WhatsApp is yet to see action on the monetization front. As a result, Facebook's top line is extremely dependent on the main platform, at least in the short term.

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The monthly active user base grew 16% during the quarter, reaching 1.79 billion users worldwide, while average revenue per user worldwide expanded nicely from $2.97 last year to $4.01, a 35% jump, helping the company's revenue jump by 59% during the third quarter compared to the previous year.

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Nobody expected that Facebook would be able to increase its ARPU in such a manner, which is also probably why the company is indicating that such growth cannot continue for ever. As a company grows larger in size and scale, it's normal for growth to slow down. Facebook is nearing 2 billion users now, which means the company has already covered most of its potential customers in developed markets, with some more room to grow in the developing markets.

It also explains why Facebook has been on a features and services adding spree in the last few months and, hopefully, we can expect some action on the WhatsApp front sooner rather than later.

Disclosure: I have no position in the stock mentioned above and no intention to initiate a position in the next 72 hours.

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This article first appeared on GuruFocus.