Facebook Inc posted strong growth in its mobile advertising business on Wednesday, but rattled investors after saying that it did not plan to boost the frequency of ads shown to users.
Shares of the world’s No. 1 online social network soared as much as 15 percent in extended trading before suddenly falling to US$47.40, down 3 percent from its US$49.10 close. The stock settled at US$49.16.
In July, Facebook said it was showing one ad per 20 stories in the newsfeed, but Facebook chief financial officer David Ebersman told analysts on Wednesday that the current ratio, although slightly higher than 5 percent, would not increase much more going forward.
Ebersman’s comments, combined with remarks suggesting that teenage users in the US were beginning to use Facebook less frequently, soured the mood abruptly on an afternoon when the company topped Wall Street’s targets with a whopping 60 percent increase in revenue, driven by its accelerating mobile business.
“There seems to be concern about the ad load not going up,” BTIG analyst Richard Greenfield said.
However, Greenfield said he believed investors were overreacting, addingg that increasing advertising prices, rather than the volume of ads, is more important for growth in Facebook’s topline.
Facebook’s newsfeed ads, which inject paid marketing messages straight into a user’s stream of news and content, have boosted Facebook’s revenue and its stock price in recent months. The ads are ideally suited for the smaller-sized screens of smartphones and other mobile devices, from which nearly half of Facebook’s monthly users now access the service.
However, the company has had to balance showing more ads inside its users’ newsfeed with the fear that too many of them would irritate fickle users and drive them elsewhere.
That is a reality that some investors may have overlooked, after Facebook reported strong third-quarter results yesterday, with advertising revenue up 66 percent.
“There’s some degree to which you can expand, but there’s an optimal level after which you risk losing your audience,” Pivotal Research Group analyst Brian Wieser said, referring to the portion of ads that Facebook shows on its service.
Revenue from mobile ads, which appear on smartphones, represented 49 percent of Facebook’s total advertising revenue in the third quarter, or roughly US$880 million. Mobile ads generated about US$150 million in the year-ago period, when Facebook was just beginning to develop its mobile ad business.
Facebook added that its ads were getting noticed: The average daily user of Facebook is “engaging” with more than one ad per week, chief executive Mark Zuckerberg said during a conference call.
Facebook said the number of its monthly active users increased to 1.19 billion as of the end of September, up from 1.15 billion at the end of June. Facebook said it counts roughly 507 million daily active mobile users.
Net income was US$425 million, or US$0.17 a share, in the three months ended Sept. 30, compared with a net loss of US$59 million, or US$0.02 a share in the year-ago period, the company said.