Facebook is a one-trick pony that can still kick - Reuters

The entrance sign to Facebook headquarters is seen in Menlo Park, California, October 10, 2018. REUTERS/Elijah Nouvelage

NEW YORK, July 28 (Reuters Breakingviews) - To its users, Facebook (FB.O) does many things. For investors, it does one: sell ads. Growth in that activity is about to slow “significantly,” the company said on Wednesday. That might seem worrying since, unlike rivals, Mark Zuckerberg’s $1 trillion company hasn’t found a reliable second source of top-line income. Fortunately, there’s still plenty to go around.

Facebook says second-quarter sales soared 56% year-over-year to $29 billion, but it shouldn’t come as a surprise that it expects not to keep up that stellar pandemic performance. Global regulatory scrutiny and privacy changes by iPhone maker Apple (AAPL.O) are among the things working against Zuckerberg’s outfit. Analysts already predict that revenue for the next two quarters will increase 32% and 21% respectively, year-on-year, according to Refinitiv.

Other technology companies had similar surges in advertising. Alphabet’s (GOOGL.O) Google said on Tuesday that ad revenue increased almost 70% to $50 billion. Meanwhile, Microsoft’s (MSFT.O) search advertising jumped more than 50% in the second quarter. But they aren’t quite as shackled to that source of income. Alphabet still relies on ad sales for $9 of every $10 it makes but is forging new paths like cloud services, and separately reports its “other bets” segment, where embryonic potential revenue-generators are housed.

Zuckerberg has turned his attention to other areas including the digital currency Libra, and more recently, an ambitious project to connect the physical and virtual worlds in a so-called metaverse. But those undertakings are either struggling to gain traction or are too nascent to make an impact on the top line. And it’s not clear either would have its own revenue stream, rather than simply acting as a magnet for more of clients’ ad budgets.

For now, that’s alright, because even slower growth can be relatively rapid as digital ad spending grows and traditional TV loses its grip on audiences. MoffettNathanson estimates that U.S. online advertising will increase by $150 billion from 2020 until 2024. If Facebook can maintain its share of approximately 25% according to eMarketer, it could increase ad sales by nearly $40 billion – equivalent to its entire North American revenue last year. There’s still time to work on plan B.

Follow @jennifersaba on Twitter

CONTEXT NEWS

- Facebook said on July 28 that second-quarter revenue rose 56% year-over-year to $29 billion. Analysts expected revenue of $28 billion, according to Refinitiv.

- The social network warned that it expects the rate of revenue growth to “decelerate significantly” in coming quarters, and “decelerate modestly” compared with 2019.

- Earnings were $10.4 billion, or $3.61 per share, compared with $5.2 billion, or $1.80 per share, in the same quarter last year.

Editing by John Foley and Amanda Gomez

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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