Facebook Inc. (NASDAQ: FB) has definitely performed well during the recent quarters in terms of top line growth. However, some analysts assert that the social networking giant will not manage to sustain its revenue growth. Now, Facebook shareholders will find out if the growth rate is indeed decelerating when the company reports its financial results after the market close on November 2.
One of the primary reasons the growth in revenue is likely to contract soon is because the exponential growth rates are unsustainable. For example, the revenue of Facebook for the second quarter was higher by a whopping 59 percent in comparison to the same quarter last year. This outstanding growth was triggered by a 63 percent surge in the company’s advertising revenue, which is responsible for 97 percent of the overall revenue.
The revenue of Alphabet’s Google, in which the major driver is digital ad revenue, edged higher by a more modest 20 percent during the latest quarter. However, as the social networking giant’s business resume its growth, the growth rate for its ad revenue will inevitably start to contract towards levels that are closer to that of Google.
Moreover, Facebook has not shown a sustained period of growth at this level. In fact, as recently as the Q2 of fiscal year 2015, Facebook’s year-over-year growth in revenue was significantly lower at 39 percent.
In addition, the most apparent reason to anticipate that the revenue growth of the company will contract in the next quarters is because Facebook’s management has warned that this is what’s going to occur.
During the earnings report for the second quarter, the Chief Financial Officer of Facebook Mr. David Wehner stated that difficult year-over-year comparisons, starting in the Q3 of this fiscal year will drive “lower advertising revenue growth rates in each successive quarter in 2016.”
While the company’s CFO admitted that the primary catalysts for growth in advertising will still be drivers this year, tough year-over-year comparisons will make it hard for Facebook to sustain the 59 percent revenue growth achieved in the second quarter.
According to the company’s management, market players should anticipate that revenue will continue to contract beyond the third quarter. The Facebook CFO warned that ad load, which is a major catalyst for the social networking giant’s advertising revenue, will not be as significant of a growth driver in the future.
On average, market analysts anticipate that revenue will edge higher by approximately 54 percent—lower compared to the 59 percent growth in the third quarter. Yet, it should be noted that this figure is still a bullish outlook considering the fact that just two quarters ago, the year-over-year revenue growth of Facebook was lower at 52 percent.