Tech

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

What if I said you could increase your salary as much as you wanted? You’d probably think it was time to walk out on a pitch for a Ponzi scheme. 

Yet Facebook can actually grow as fast as it wants. 

Here's the three-part playbook Facebook has used to advance from an infant public company in 2012 to the eighth-biggest company in the country by stock market value: People spend a lot more time on Facebook. Companies want to throw more money at Facebook to help find potential buyers for their stuff. Facebook is willing to shove more ads for that stuff at the users scrolling through photos of a cousin's wedding or philosophical tomes about Kanye West's latest feud. Check. Check. And check.

In the holy trinity of user growth, advertiser demand and number of ads, the biggest element in Facebook's control is how many ads it lets users see -- what the industry calls "ad load." The big shift in the last few months was that Facebook cranked up the number of advertisements it showed on Instagram and continued to jam more ads in the online videos users increasingly gobble up on Facebook. Boy, is it working. 

In the three months ended Dec. 31, revenue rose 52 percent compared with sales in the period a year earlier, the company said Wednesday. That was the fastest rate of revenue growth since the third quarter of 2014. 

How many companies with $18 billion in yearly sales can increase revenue by more than 50 percent? None. No other company has done that recently, according to Bloomberg data. Wall Street darling Netflix has less than half the yearly revenue of Facebook, and its growth rate was 23 percent in the fourth quarter. 

Facebook Power
Facebook's revenue growth accelerated in the December quarter as the company turned up the ad sales on its social network and Instagram.
Source: Bloomberg

As Facebook's chief financial officer modestly told analysts in November, "Over time ad load has been one of the factors driving year-over-year growth." The company said that in the fourth quarter the total number of ads increased 29 percent from a year earlier. That was the first increase in more than two years, in part because Facebook had been throwing out cheap Web ads and replacing them with higher priced mobile or video ones. The average ad price rose 21 percent even as the supply of ads also went up, Facebook executives said.

In theory, Facebook can turn the advertisements crank as fast as it needs to keep the growth machine churning. This chart shows the average amount of money Facebook makes from each user. Keeping that number growing is crucial to sustaining revenue even when Facebook runs out of new people to lure to its social network. The pace of growth peaked 18 months ago but is starting to pick back up. 

User Experience
The gains in revenue that Facebook earns from each user peaked two years ago but is starting to accelerate again.
Source: Bloomberg

There is some theoretical breaking point where people using Facebook and Instagram will rebel, either by tuning out ads or ditching the services entirely. For now, though, users continue to tolerate the ad load, and that is propelling Facebook's accelerated rate of revenue growth. 

No one really knows where this breaking point is. Facebook will find out when the amount of time people spend on its networks starts to decline, but that hasn't happened yet. Facebook said its monthly active users at the end of December reached 1.59 billion people -- more than the population of China. Facebook's operating profit margin also perked up to 44 percent in the fourth quarter from 32 percent three months earlier.

Runaway growth doesn’t last forever -- just ask Apple. But for now, Facebook has it all: hyper growth, fatter operating margins and a still growing base of users. What's not to "like"? 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net