Facebook's days of easy growth from the shift to mobile may be over

Key Points
  • The contribution of mobile sales to overall revenue has flattened out
  • Mobile ad sales are already more than 50 percent of all ads in the industry
  • Wall Street expects overall sales growth to slow in the second half of this year, and again next year
Mark Zuckerberg, CEO of Facebook.
Source: Facebook

will have a harder time relying on the shift from desktop to mobile ads to fuel its top-line growth, based on data in its Q1 2017 earnings report.

The company also said its capital expenditures will rise more than 50 percent this year.

That expense guidance from CFO David Wehner, which suggests the company is having to spend more to support growth, helped push Facebook shares down as much as 3.5 percent in after-hours trading.

The drop came even though Facebook's first-quarter revenue and per-share profit topped for the period topped Wall Street expectations.

While mobile ad sales rose 58 percent from a year earlier, the contribution those sales make to Facebook's overall revenue has remained relatively flat for three straight quarters.

In its most recent period, the figure was 85 percent, compared to 84 percent in each of the prior two quarters.

Facebook has benefited immensely as consumers have switched to surfing the Internet with smartphones rather than PCs.

Thanks to its sophisticated ad tools, Facebook has positioned itself alongside Google as a dominant player in the business of mobile ads.

Yet the bulk of that transition has already occurred.

In 2016, revenue from mobile advertising passed sales of desktop ads for the first time, according to an April report from the Interactive Advertising Bureau.

Facebook's latest data suggests the company will now have to work harder to maintain the type of growth that has caused investors to push its shares up 30 percent this year.

"Everyone is already using their phones all day, there's not a ton of new ad inventory" coming online, says Adam Foroughi, CEO of AppLovin, which helps marketers run digital ad campaigns inside apps.

Facebook, like Google, is going to have to either find more inventory or use technology to boost revenue per ad, Foroughi says.

It appears that inventory growth is slowing -- Facebook told analysts on the call that the number of ad impressions delivered in Q1 was up 32% from a year ago. In Q3 2016, growth from a year ago was much higher, at 50%.

So it looks as if revenue per ad will be key. Indeed, Wehner said on the call that the company's average price per ad rose 14 percent from a year earlier.

Facebook's full-year revenue growth is expected to slow to 26 percent next year, from 38 percent in 2017, according to the latest estimates from Wall Street analysts.