As Facebook's cash cow slows, Wall Street is looking to Instagram and video for growth
Facebook has warned that its explosive revenue growth will slow during mid-2017, so expect more of a focus on opportunities in video and Instagram when the company reports first-quarter earnings on Wednesday.
While analysts predict Facebook's revenue to grow by 42% to $7.83 billion, the social network is nearing the limit of ads it can show in its cash cow, the News Feed. That's why CFO Dave Wehner has warned that revenue growth will "come down meaningfully" in 2017.
The good news is that Facebook is seeing promising growth in two key areas: video and Instagram.
On the video front, the company has started to widen its rollout of mid-roll ads, which publishers can sandwich in the middle of their content. Facebook is also ramping up its own slate of original shows. CEO Mark Zuckerberg has called video a "megatrend" that will eventually provide a tailwind to the business.
Instagram, which recently hit 700 million users, is growing faster than ever. The app is expected to bring in $3.92 billion in revenue this year, according to eMarketer. That's a 106% increase from 2016 and a 12.3% chunk of Facebook's worldwide mobile ad revenue.
Facebook's other bets, like Messenger, WhatsApp and Oculus VR, won't likely have a material effect on revenue in the near term.
Regardless of worry over ad space in the News Feed, Facebook is still in a healthy number-two position to Google in the digital ad space. Google and Facebook together accounted for an astounding 99% of revenue growth from digital advertising in the US last year, according to an analysis of IAB estimates by Pivotal Research senior analyst Brian Wieser. Facebook specifically accounted for 77% of the digital ad industry's overall growth, he noted.
The key numbers
Here are the expected numbers for Facebook's Q1 earnings, based on analyst projections compiled by Bloomberg:
- EPS (adjusted): $1.12, up 45% from the year-ago period.
- Revenue: $7.83 billion, up 42% from the year-ago period.