NEW YORK – It’s time for Facebook to start looking beyond Madison Avenue. The social network beat profit estimates in the latest quarter as more brands sought to reach its 2 billion users. Yet the torrid pace of revenue growth is cooling off, mobile’s share of advertising has limited upside, and regulators are increasingly questioning the company’s dominance.
For sure, the $480 billion firm run by founder Mark Zuckerberg is firing on all cylinders. Net income soared 71 percent in the second quarter, and earnings of $1.32 a share handily beat analysts’ estimates. That pushed the stock to a new high, extending its gain for the year to nearly 44 percent. Revenue merely matched estimates, rising 47 percent, but that was no small feat given that executives have been warning for months of an imminent ad slowdown.
That could hurt given that nearly all of the company’s top line comes from selling ads to everyone from small businesses to global conglomerates. Mobile growth has been particularly strong, but it now generates 87 percent of advertising revenue, up 3 percentage points from a year earlier.
Facebook’s 23 percent slice of the global digital mobile-advertising market trails Google’s 35 percent, according to research from eMarketer, which suggests some further growth potential. Yet there are small cracks on the surface that could turn into more troublesome gaps down the road. European trustbusters are eagerly going after the tech giants, slapping the search behemoth run by Sundar Pichai with a record $2.7 billion fine last month. Such action could spur U.S. legislators and regulators to give closer scrutiny to the two companies’ competitive advantages.
Facebook isn’t standing still. Expenses were up 33 percent in the latest quarter and it’s investing aggressively. On a call with analysts Wednesday, Zuckerberg talked up the merits of artificial intelligence – a nod to his spat with Silicon Valley peer Elon Musk. Unlike the threat that the Tesla boss perceives in that technology, Zuckerberg sees the potential for AI to help flag fake stories in news feeds and help advertisers figure out which consumers would be most receptive to a pitch. By contrast, he barely mentioned virtual reality, three years after spending $2 billion to acquire Oculus.
Google parent Alphabet is investing heavily in things like self-driving cars, and Amazon has turned cloud services into a big money maker. With Facebook near the top of its game, it should be looking harder for alternatives of its own.