Facebook crushes Q3 earnings but spooks investors with warning of a spending spree

Facebook CEO Mark Zuckerberg.

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Facebook CEO Mark Zuckerberg.
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Getty

    Facebook beat Wall Street’s expectations for the third quarter and reported its best earnings ever. But CEO Mark Zuckerberg warned, “We’re investing so much in security that it will impact our profitability.” Facebook plans to add 10,000 more employees to aid its safety and security efforts by the end of 2018.

Facebook blew past Wall Street’s third-quarter financial targets on Wednesday but cautioned that future profitability will be impacted by increased investments around its efforts to fight fake news and abuse.

The increasing spending, which Facebook executives elaborated on during the conference call with analysts on Wednesday, drove Facebook’s shares down 2% in after-hours trading, reversing the stock’s initial bump after results were announced.

“I am dead serious about this,” Facebook CEO Mark Zuckerberg said on the call Wednesday, explaining the investment in security.

Facebook’s Q3 report card was a testament to the power of the social network’s money-making engine, as the company announced that quarterly revenue topped $10 billion for the first time thanks to the more than 6 million businesses that now pay to advertise on its service. The average price that Facebook charges for an ad increased 35% from the same period last year. And Facebook grew its own ranks, adding more than 2,500 new staffers in what executives described as its biggest hiring quarter ever.

Here are the key numbers from Facebook’s Q3 results:

    Revenue: $10.33 billion vs. $9.84 billion expected, up 47% from the year-ago period. EPS (GAAP): $1.59 vs. $1.28 expected, up 77% from the year-ago period. Monthly active users: 2.07 billion, up from 2.01 billion last quarter. Daily active users: 1.37 billion, up from 1.32 billion last quarter.

Big spending ahead

But Facebook third quarter report card also revealed worrisome signs of weakness in the business, as revenue growth decelerated for the fifth consecutive quarter, a trend the company expects to continue for the foreseeable future. Facebook also bumped up the number of “duplicate” accounts on its service, estimating that 10% of its roughly 2 billion monthly users are now duplicate accounts, up from its previous estimate of 6%.

Most worrisome to Wall Street however was Facebook’s warning 2018 will be a “significant” investment year, as it boosts capital expenditures, pours money into video efforts and scrambles to fortify its service from the kind of abuse it experienced during the 2016 elections.

Zuckerberg warned that Facebook’s meteoric profit growth will start to slow as it ramps up hiring. In a statement to investors, he said the company is “investing so much in security” that it will impact future profitability.

“Protecting our community is more important than maximizing our profits,” he said.

Facebook’s top lawyer, Colin Stretch, told US lawmakers this week that the company planned to add roughly 10,000 more employees by the end of 2018 to aid its efforts in eradicating fake news, misinformation, and state-sponsored efforts to sway public opinion.

Revenue is decelerating but video is a big opportunity

Investors are looking for Facebook’s ability to grow its ad revenue from sources besides the News Feed, which is nearing the limit of ads it can show. Instagram ads and Facebook’s efforts to monetize videos through its Watch tab are considered to be the company’s strongest growth bets in the near term.

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Facebook

Facebook CFO Dave Wehner reiterated Wednesday that ad revenue growth would continue to slow as the limit of ads that can be shown in the News Feed is reached. He noted that revenue growth will be more based on increases in ad prices and not inventory supply.

Despite all the controversy over social media and election interference, Facebook’s number of daily users continued to increase during Q3, while the level of user engagement remained steady:

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Facebook

Wehner also said that the company planned to dramatically increase spending in 2018 by 45-60%. He said the increase was due to the hiring of more employees to work on security and safety along with upfront payments Facebook is making for episodic shows in its new Watch tab.

Facebook has yet to give any statistics about the early use of Watch, but Zuckerberg said Wednesday that the plan is to eventually monetize all videos through ad breaks.

Despite mounting criticism from US lawmakers over Russia’s use of its platform to spread propaganda, Facebook’s stock was trading at all-time highs ahead of Wednesday’s results. Shares of Facebook have risen more than 5% in the last week alone on the back of strong earnings from Google, Amazon, and Microsoft

Here are some more charts from Facebook’s Q3 results:

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Facebook

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Facebook

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Facebook