As Growth Decelerates, What's Next For Facebook's Business?
By Daniel Sparks | November 01, 2018 |

Facebook's (NASDAQ:FB) revenue growth rates have taken a big hit recently. Third-quarter revenue increased by 33% year over year -- well below the social network's 49% year-over-year revenue growth just two quarters ago. At the same time, the company's operating margin has narrowed from 50% in the third quarter of 2017 to 42% in Q3 of this year since Facebook's costs are rising faster than revenue.

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With growth decelerating and costs rising, this prompts some important questions:

-- What's next for Facebook?
-- Are the social network's years of strong growth behind it?
-- How much further will the company's operating margin narrow?

Fortunately, Facebook management spent a good portion of its third-quarter earnings call discussing matters like these. Here's what investors need to know.

Further Deceleration Is On The Way
The first thing investors should know is that this isn't the end of Facebook's decelerating revenue growth. Indeed, management expects its year-over-year revenue growth rate in Q4 to fall by about 5 to 9 percentage points compared to Q3.

CFO David Wehner listed several reasons for this deceleration. First, ad impression growth is expected to come from products and geographies "that monetize at lower rates." Second, data privacy initiatives are weighing on ad pricing growth. Finally, the company is focusing on growing its Stories format. As a result, Stories' "more prominent placement on Facebook will displace some ad impression opportunities."

Challenges And Opportunities
But Facebook's growth days aren't behind it, according to CEO Mark Zuckerberg. Sure, he admitted the company continues to face "increased safety and security threats" that will require more investment and action. On the other hand, Zuckerberg noted that there are big opportunities for growth in private messaging, the Stories format, and video.

Of course, there are some hurdles Facebook will have to overcome to take full advantage of these growth opportunities. Though the company has already aggressively built out its messaging and Stories capabilities, Zuckerberg noted that "it will take some time for our business to catch up to our community growth." Furthermore, even though Facebook is seeing rapid growth in video on its platform, the CEO said that the company is "well behind [Alphabet's] YouTube and still working to make this a unique people-centric experience."

2019: Another Big Investment Year
Of course, as Facebook continues to invest in data privacy, security, messaging, Stories, video, and more speculative areas like augmented and virtual reality, management expects costs to continue climbing at mind-boggling rates -- even into next year.

"I expect 2019 to be another year of significant investment," Zuckerberg stated. Specifically, Wehner said Facebook expects operating expenses during the year to rise 40% to 50% compared to 2018 and capital expenditures to be about $18 billion to $20 billion.

2020 And Beyond
Beyond 2020, however, management seems intent on getting its costs under control.

"I want you to know that looking out beyond 2019 I know that we need to make sure our costs and revenue are better matched over time, and that's something that I'm focused on as well," Zuckerberg remarked.

Wehner also said that he expects the company's trend of a narrowing operating margin to moderate beyond 2019: "It's hard to be too prescriptive about 2020 and beyond, but I think the biggest change will be 2019."

Wehner has previously forecast Facebook's operating margin to trend "toward the mid-30s on a percentage basis" in 2019. If the company's operating margin structure remains around this level, it would be well above Alphabet's, which has hovered around 25% over the past five years.

This article originally appeared on The Motley Fool.

 

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