Here's why Facebook stock tanked despite the company crushing targets

Photo: Justin Sullivan/ Getty Images.

Facebook stock is down more than 7% in after-hours trading after the company told investors to brace for a “meaningful” slowdown in revenue growth rates and for “aggressive” investments next year.

During the company’s conference call with analysts on Wednesday, CFO Dave Wehner recapped the company’s strong performance in Q3, including a 56% increase in revenue and a beat on the bottom line.

But Wehner also warned that Facebook is starting to hit the limit of how many ads it can squeeze into its users’ newsfeeds.

The CFO said the same thing about ad loads three months ago, so it wasn’t a complete surprise. But Wehner’s characterization on Thursday that the ad load limit will significantly cut into Facebook’s ad revenue growth rates underscored the gravity of the situation. Here’s how he put it:

“As I mentioned last quarter, we continue to expect ad load will play a less significant role driving revenue growth after mid-2017. Over the past two years we have averaged about 50% compound revenue growth in advertising. Ad load has been one of the three primary factors fuelling that growth. With a much smaller contribution from this important factor going forward, we expect to see ad revenue growth rates come down meaningfully.”

Big spending ahead

While revenue growth slows, spending will accelerate, Wehner warned in equally stark terms.

2017 will be an “aggressive” spending year as Facebook ramps up hiring. And Facebook’s capital expenditures will grow “substantially” next year.

Facebook has “a number of projects underway on the datacenter front, a number of projects that are going to need ongoing funding into 2017,” Wehner explained later on the call.

The last time Facebook warned shareholders of an “investment” year was ahead of 2015. Facebook stayed true to its word, with annual operating expenses growth of 57% sharply outpacing the company’s 44% revenue growth rate that year.

That’s almost a mirror image of the pattern in the most recent quarter, which saw Facebook boost revenue by 56% while growing spending only 28%.

If Facebook is setting a pattern, then 2017 should be an investment year and 2018 will be a year of to reap the benefits.

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