Facebook (FB) is set to report slowing revenue growth figures, which could diminish the growth thesis even further than what initial survey data suggested. While, Facebook remains a compelling growth stock given its more diminished valuation, more concrete data suggests that the revenue growth will continue to decelerate as the app has matured, and usage trends are slowly trending lower. Advertising agencies aren’t generating the same ROI, and the amount spent on digital ads is expected to decelerate in the foreseeable quarters.
Facebook’s stock has trended considerably higher in the past couple months, and part of this was driven by a recovery in stock prices in general, paired with the optimism that the business seemed undervalued at 18x to 22x trailing earnings.
However, the growth assumptions tied to the advertising business should be moderated, as there were some troubling signals from recent ad agency checks that suggests that spending trends are in fact slowing, and while the transition to digital has resulted in some gains for digital ad companies like Facebook and Alphabet, it seems like optimism tied to digital advertising has been trending lower for quite some time.
CFO Dave Wehner from Q4’18 earnings call:
Turning now to the revenue outlook. In Q1, we expect our total revenue growth rate to decelerate by a mid-single-digit percentage on a constant currency basis compared to the Q4 rate. We also expect that our revenue growth rates will continue to decelerate sequentially throughout 2019 on a constant currency basis.
The lackluster guidance for the duration of the fiscal year more or less matches what’s been going on based on third-party industry checks. The digital advertising business is slowing down, as advertisers have reduced spending by -1% QTD. There have been a couple cases where spending has cutback, but this is more troubling for Facebook given its heightened market share of advertising in general, and with advertisers trimming or reducing spend in general.
This might be a temporary headwind, but based on the data we have so far, agency spending is trending lower, and the survey data is representative of 70% of all ad agencies. The uptake from SMBs has slowed, and now, there’s not as many growth levers to depend upon. If pricing on ads go up, advertisers will spend less on advertising, or move to other alternatives. Though, it’s questionable what alternatives exist aside from Google’s various website properties. Even so, more agencies have shifted spending to Google, and less towards Facebook in recent months (based on surveys). We pair this with troubling indicators on total Facebook app usage, and it’s more likely that revenue growth will start to decelerate to perhaps 20% to 15% y/y growth rates as indicated by prior financial outlook.
The slowdown isn’t isolated to just advertisers pulling back on digital spending, however. It seems like users on the platform have reached a point of advertising fatigue, whereby the engagement rate for ads have consistently trended lower which transitions more cost or burden onto advertisers who are looking for a positive ROI tied to their advertising spending. This is no longer the golden era of Facebook advertising in other words, and despite what most pundits or hopeful commentators might say about Facebook ads there’s less demand for advertising at current pricing, and current engagement levels.
We know for a fact that Facebook’s advertising revenue will slow as a function of usage dropping for the social app on both mobile and desktop. The unique visits in terms of billions of minutes has dropped by appx. 5% based on recent engagement trends for the month of February. The month of January posted even worse figures of 9.6% decline in terms of platform usage, which translates to less advertising impressions made available at daily auction, and advertising agencies unwilling to pay higher pricing for ads that consistently trended lower in terms of engagement.
When you pile this all up, the growth thesis tied to Facebook is set to decelerate quite quickly, and there’s not much that can be done in the interim to boost financial results despite efforts to monetize Instagram as a prospective alternative.
Despite the troubling indicators from Facebook, the data on Google ads has been sounder, and with more inventory growth tied to heightened usage for various Google sites. When inventory grows, pricing tends to drop, and advertisers can bid lower prices for those ad units, hence advertisers have been migrating more of their spend to various Google sites despite the overwhelming popularity of Facebook ads due to the added tracking functionality. Even so, the hype tied to Facebook’s ad platform is starting to wane, and with less inventory, and higher prices anticipated growth comps will trend considerably lower for the first time in it corporate history.
A more mature growth business isn’t necessarily a bad thing, but expectations on investor returns should moderate in the coming years.
Disclosure: The author has no position in FB. The information contained herein is for informational purposes only.
Read more on FB: