Wall Street had field days July 27 and 28 with most of its tech titans exceeding expectations–results that were enough to send most of these companies’ stocks to record highs.
The two stars of the show were Facebook and Google, which had better than expected results. For the second quarter of 2016, Facebook reported revenue of $6.4 billion and net income of $2.05 billion. Google reported revenue of $21.5 billion and net income of $4.88 billion.
Admittedly, the companies are still miles apart in terms of size. Facebook will make around $27 billion in revenue this year and Google about $84 billion, according to analyst estimates. So Google is roughly three times the size of Facebook in terms of revenue.
But Facebook is still showing a stellar growth. On a year-on-year basis, Facebook grew its revenue by a whopping 59 percent and its income by 186 percent. Google grew 21 percent and 24 percent, respectively.
Where Is Facebook’s Growth Coming From?
So where is Facebook’s massive growth coming from? The company says it has 1.71 billion global users. That is a 15 percent growth year-on-year, although the growth rate is actually decelerating. So it’s not coming from the sheer number of users. Facebook also hit 1 billion daily mobile users and 1 billion messenger product users, but those are not driving the growth either.
What is helping Facebook is the growth of its advertising business. Year-on-year, its ad revenue grew by 63 percent. And mobile ads now account for a massive 84 percent of those ad dollars. So Facebook’s users on mobile are contributing the most to the company’s bottom line.
The company’s average worldwide revenue per user is now at $3.82, which is up 15 percent from last quarter. The company earns $14.34 annually per user in North America.
However, Facebook’s CFO Dave Wehner admitted during the earnings call that the ad growth will slow down going forward:
“Consequently, we anticipate lower advertising revenue growth rates in each successive quarter in 2016. Additionally, we anticipate ad load on Facebook will continue to grow modestly over the next 12 months and then will be a less significant factor driving revenue growth after mid-2017,” he said.
“Since ad load has been one of the important factors in our recent strong period of revenue growth, we expect the rate at which we are able to grow revenue will be impacted accordingly.”
So the ad load is the key. The way Facebook has been able to grow its ad revenue—which comprises the vast majority of its revenue—is through showing its user base more ads.
And while ad load on Facebook itself might not increase, there’s always the possibility to see more ads on Facebook’s other products. Facebook recently introduced ways to purchase and display image and video ads on Instagram, and there are rumors that its heavily used Messenger product might start to show ads, as well.
Executives at the social networking giant are quiet about whether its popular text messaging app WhatsApp—that it bought for $22 billion in October 2014—will also eventually get ads, but you can guess that Facebook will try to realize revenue growth whatever it can use to continue to please Wall Street.
Google’s Growth Story
As for Google? It is growing as well, albeit more slowly than Facebook. Its ad growth was more or less the same story as every quarter: less cost per ad, but more ads shown, and hence more revenue. One big growth story this quarter was the high mobile ad growth, and that might be something to watch over the upcoming quarters.
Google’s big growth story, however, doesn’t seem to be ad-driven anymore. Its ad revenue, which still comprises the majority of Google’s revenue, grew a modest 19.5 percent year-on-year.
Its real growth came from its “other revenues” item line, which grew 33 percent annually to $2.17 billion, or just over 10 percent of total revenue. That “other revenues” item line counts most of its significant non-ads business, such as its cloud platform, Google Play app, entertainment store revenue, and hardware sales.
Non-ad business is expected to grow further as Google gets more and more into enterprise services with its cloud and app platforms.
