Facebook reaps huge profits, but a storm could be on the horizon

3 Nov 2016

Facebook corporate headquarters campus sign in Silicon Valley. Image: Lynn Y/Shutterstock

It is another bumper quarter for Facebook as the company reports profits far surpassing expectations, but just like a rollercoaster, it admits its current model of success can’t go on forever.

The latest quarterly earnings report from Facebook reveals a more than healthy bank balance, with the company having reaped $27bn in revenue this year so far. Its revenue for Q3 2016 alone is $7bn.

Having cornered a significant chunk of the mobile advertising sector, this surge marks a 56pc increase on last year, with a quarterly profit of $2.4bn and a tripling on previous earnings.

Mobile advertising dominates

Now surpassing the billion mark in terms of people accessing the social media platform through mobile, it is no surprise that Facebook’s mobile advertising business is worth nearly $6bn to the company.

To put this in comparison with the rest of its revenue generators, mobile advertising now accounts for 84pc of its total advertising revenue, up from 78pc on the same time last year.

Despite being on quite the financial high, the company’s CFO David Wehner is certainly not resting on his laurels. During a call following the release of the earnings, he admitted that the company can’t keep making such profits forever.

Resulting in a slump in shares by 8pc, Wehner said that this growth rate will decline in 2017 as it changes the way advertising appears to its users. This will start with reducing the number of adverts in a person’s news feed.

Focus changes to video

Mobile advertising, Wehner said, will be offering a “much smaller contribution” from next year and profits will “come down meaningfully”.

Other factors contributing to a drop in the value of its stock price was the announcement that it plans to spend considerably more in the coming year, to expand its data centres and hire the engineers to maintain them.

Meanwhile, Facebook’s founder Mark Zuckerberg highlighted its new video-first policy, which he believes will offer a new source of revenue.

The idea behind this is that with more videos on a person’s news feed, the likelihood increases that they will spend longer on the page and access lucrative TV advertising revenue in the process.

Wehner’s comments haven’t come as a surprise to analysts, however. Speaking with the Wall Street Journal, Brian Wieser of Pivotal Research said: “The growth rate has to be slower; it’s a law of large numbers, if nothing else. Nobody was expecting the company to grow at the same rate.”

Facebook corporate headquarters campus sign in Silicon Valley. Image: Lynn Y/Shutterstock

Colm Gorey was a senior journalist with Silicon Republic