Facebook Battles Controversy

Published May 5, 2017 | Written by Sramana Mitra

According to eMarketer’s report on US advertising, total digital ad spending in the country is expected to grow 16% to $83 billion this year. While Alphabet will remain the leader in the market with 41% of US digital ad revenues, it will continue to lose ground to Facebook (NASDAQ: FB) within display advertising. Facebook’s US display business is expected to grow to 32% to $16.33 billion and account for 39% of the US display market. Alphabet will be a distant second with 12.5% of display ad share.

Facebook’s Financials

Facebook’s Q1 revenues grew an impressive 51% over the year to $7.857 billion, ahead of the market’s estimates of $7.83 billion. EPS of $1.04 was significantly ahead of the Street’s projections of $0.87. Facebook announced that it was no longer reporting adjusted expenses, income, tax rate, and earnings per share. The change in reporting measure did worry the market as the stock fell a bit despite the earnings beat.

By segment, advertising revenues grew 51% to $7.86 billion, ahead of the market’s expectations of $7.67 billion. Ad revenue growth is recording a minor slowdown. In the last quarter of fiscal 2016, ad revenues had reported a 53% increase. Revenues from payments and other fees fell 3% to $175 million.

Among operating metrics, Facebook’s daily active user count improved 18% to 1.28 billion. It is slowly reaching up to the 2 billion mark as its monthly active user base grew 17% to 1.94 billion. Facebook’s recent growth was driven by emerging markets. It had 716 million users in the Asia Pacific region, recording a growth of 27% over the year compared with 5% growth in the US and 6% growth in Europe.

Facebook does not provide an outlook, but the market is expecting its full-year revenue growth to slow to 26% next year from 38% in 2017.

Facebook’s Ad Worries

Analysts estimate that Facebook will continue to have a tough time in delivering ad revenue growth. While mobile ad sales may have grown 58% over the year in the quarter, their share of the total revenues has been relatively flat. Mobile advertising accounted for 85% of revenues in the current quarter compared with 84% for the last two quarters and 80% a year ago.

But the market is still expecting Facebook to continue to deliver stellar growth on its mobile ad revenues. Analysts admit that there isn’t much new ad inventory available as people are already using their phones actively. Additionally, adding more ads to the platform may not necessarily be productive. A survey conducted by BI Intelligence earlier this year found that out of the 1,740 consumers surveyed, 45% of them found Facebook ads annoying. Facebook will have to figure out a way to either find more inventory or use technology to boost revenue per ad. For Facebook, the inventory growth is already slowing. According to its results, the number of ad impressions delivered in Q1 improved 32% over the year, but last year, that number had reached as high as 50%.

Facebook and Violent Videos

Besides growing ad revenues, Facebook must also deal with the controversy surrounding its live videos – especially the violent ones. The issue came into spotlight recently when users expressed their concern over two video posts last month that showed killings in Thailand and the US. Besides, Facebook is also facing regulatory issues on its content. Earlier this week, lawmakers in the UK accused social media companies of doing a shameful job removing child abuse and other potentially illegal material. In Germany, lawmakers have threatened to fine the company if it does nor remove at least 70% of offending posts within 24 hours. In response, Facebook announced plans to add 3,000 employees to accelerate the process of removal of such content. Facebook believes that while AI may be the way to solve the issue in the future, in its current state, the technology is not smart enough to handle the requirement independently.

Recently, several brands had announced plans to boycott Alphabet because it displayed ads of questionable content. Like Facebook, Alphabet’s reaction too was to hire people to sift through the content. But the massive reach of channels like YouTube and Facebook makes it a challenging task to accomplish. And, their size is also its savior, because advertisers don’t really have many options to go to.

The stock had touched a 52-week high of $153.48 in anticipation of better results. In reaction to the result though, the stock had dipped to $150.85 with a market capitalization of $434.26 billion. It is still trading nearly 50% higher than the 52-week low of $108.23 it had fallen to in June last year.

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