Facebook’s Q2 2018 earnings call was not well-received by investors as evidenced by the stock’s 19 percent price drop equating to the largest-ever loss in market value in one day for a U.S. traded company. But if you’re a marketer looking to forecast your spending on social advertising over the next several years, Facebook’s latest earnings call should not materially alter your outlook.
What really spooked investors was the statement by Facebook that its operating margins would drop into the mid-30 percent range over the next several years – down from 45% and 50% in 2016 and 2017, respectively. This means that Facebook’s earnings will take a hit. But as a marketer, this coming decline in profitability is actually good news because it comes as a result of Facebook’s plans to increase investments in privacy and security. As my colleague Jessica Liu notes in her blog post, this increase represents an encouraging emphasis on quality which will better preserve social advertising’s attractiveness over the longer term.
However, marketers should be less interested in Facebook’s earnings and more interested in its revenue because of the way it serves as a barometer for the pace of social ad spending. For this reason, the more relevant negative surprise was Facebook’s warning that revenue growth will decelerate abruptly in Q3 and Q4 2018 at a high single-digit rate. While this undoubtedly caught many Facebook watchers off guard, in retrospect it should not come as too much of shock. Facebook has been warning of an impending revenue deceleration since at least Q1 2017. And as we noted in our Digital Marketing Tracker, Q1 2018, ad price growth – the main driver of ad revenue over the prior four quarters – would increasingly be at risk as it approached more difficult year-over-year comparisons.
This deceleration has been implicitly built into our Social Media Advertising Forecast, 2017 To 2022 (Global) and therefore does not materially alter our outlook. While the pace of deceleration will certainly be more abrupt than we would have expected, revenue growth in Q1 and Q2 2018 was better than we anticipated. Thus, Facebook’s average quarterly ad revenue growth over the four quarters of 2018 is still on track to exceed our forecast for overall social ad spending growth in 2018.
And even with this deceleration, our Digital Marketing Tracker shows that Facebook will remain one of the largest recipients of incremental digital ad spending globally.