Why Facebook expects its ad revenue growth to slow in Q2

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Facebook’s showing strong growth in the online advertising market

Facebook (FB) has managed to consistently grow its advertising revenues over the last few quarters. In Q1 2014, Facebook’s ad revenue showed a year-over-year growth rate of 82%—the highest growth rate in the last three years. As the below chart shows, in addition to growing at a strong rate in absolute terms, Facebook is also competing well in the overall online advertising market. Facebook is well ahead of its direct competitors Yahoo (YHOO), Google (GOOG), and LinkedIn (LNKD) in terms of advertising growth rates, and the company only lags behind Twitter (TWTR).

The ramp-up of News Feed ads in 2013 will make a year-over-year comparison more challenging

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Facebook introduced News Feed ads in Q1 last year. News Feed ads have significantly higher engagement, click-through rates, and price per ad compared to right-hand column ads, so a higher proportion of ads appearing in News Feed drives up the overall average price per ad. In fact, News Feed ads have been the major driver behind the strong overall advertising revenue growth for Facebook. So Facebook believes its year-over-year comparisons will become more challenging going forward.

Facebook’s management commented, “One of the things that contributed to that growth rate is the ramp up of newsfeed ads that in Q1 of last year was still really early in that part of the journey and so the comparison between the state of newsfeed ads in the Q1 we’re reporting now in a year ago is meaningfully different. As the comps become more difficult, we continue to expect that over the rest of 2014, our year-over-year ad revenue growth rates will decline from the Q1 rate and be meaningfully lower by the end of the year.”

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