Tech

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

There are a lot of question marks about Facebook. It's not clear whether its effort to remake itself into the world's new living-room television will pay off. It's not clear whether it can make money from the billions of people using its messaging technologies, WhatsApp and Messenger. And it's not clear whether Facebook can stay relevant as people find other ways to spend their time or are simply put off by what the social network has become. 

But there's still a lot that's right with Facebook. People have been complaining for years that they hate using Facebook, and yet it keeps commanding a growing amount of the world's time. And more crucially, Facebook keeps showing it is an essential tool for modern companies to find their customers. 

In the third quarter, Facebook said its revenue growth rate accelerated to 47 percent, and the company pulled in an operating profit margin of 50 percent. That is remarkable for any company, let alone one that is already one of the world's biggest public companies by market value. 

This Is Fine
Facebook has warned its revenue growth would start to slow by now. Instead it re-accelerated.
Source: Bloomberg and Facebook

There are a couple of spots of worry, though. One, the average number of people who used Facebook or Facebook Messenger at least once a day reached 1.37 billion in September, and while the figure is impressively massive it was also the slowest year-over-year growth ever in daily users. The question is whether this was a blip or a sign that Facebook will have a tougher time drawing in more people. 

Uh Oh
The average number of Facebook daily users grew by the slowest rate ever
Sources: Bloomberg and Facebook

And second, CEO Mark Zuckerberg said that the company would hire more people to weed out misinformation on Facebook, a move that will "impact profitability." This is both an obvious consequence of Facebook's recent headaches with state-sponsored propaganda and a surprising admission from a company that has until recently seemed confident in its ability to police its digital hangouts without much impact.

Executives said that 2018 would broadly be a year of heavy spending, on policing Facebook, to buy rights to web video programs and for capital projects.

Still, the quarterly results showed Facebook's business is in peak health. The surprisingly strong numbers came after a year of Facebook executives' warnings that revenue growth would start to slow right about now. Instead, growth has re-accelerated. 

Facebook has cautioned that it can't keep stuffing more and more ads in the news feed, its main digital hangout. Executives also said its strategy to prioritize viewing of digital videos on Facebook properties comes with a downside: a smaller number of spots to place commercial messages.

Those factors aren't yet denting Facebook's sales growth, although they might in the future. It's true that while Facebook's core advertising business built around the news feed is going like gangbusters, the company hasn't proved that it can mint money from hoped-for growth areas like its new "Watch" section of TV-like videos, Messenger and more. Instagram seems to be a money machine, but Facebook doesn't break out its revenue.

Leader of the Pack
Facebook is the best-performing technology stock in the S&P 500 this year
Source: Bloomberg

And as Facebook has turned in one impressive financial performance after another, it grows tougher to keep pulling out happy surprises for investors. The company on Wednesday reached a record market value, and the 57 percent jump this year in Facebook's share price makes it the best-performing technology stock in the S&P 500 Index.

In a sign of high expectations, even the strong third-quarter performance was met initially with a spare uptick in Facebook's stock price in after-hours trading and then a decline as investors digested Facebook's forecast that profit margins would contract as it plans to boost operating spending by 45 to 60 percent next year. That includes the costs of the company's belated realization that it needs to do more to take responsibility for its growing power to inform the world. 

That means, yes, Facebook will need to spend more commensurate with its power. And there is pressure on the company to keep churning its news feed money machine while nurturing potential growth areas including mobile videos and its messaging apps. But for now, Facebook continues to be a combination of growth and profitability that few companies can match.

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

  1. Well, that's a downside for Facebook's business. It might not be a downside for the billions of people who tune into Facebook.

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