Facebook: hey big spender

It is a truth universally acknowledged that when a Silicon Valley advertising company reaches a certain size, it must be in want of ambitious vanity projects on which to squander cash. Look no further than Google, which dominates global search advertising but cannot manage to keep cost growth in line with revenue growth. Now Facebook is heading down a similar path, with expensive research projects in areas such as artificial intelligence and rural internet access driving up operating expenses. GAAP operating income shrank 13 per cent in the first quarter, year on year (this includes share-based compensation related to recent acquisitions).

Facebook's top-line growth is still impressive. Its user base is growing and users are getting more and more hooked: growth in daily active users accelerated sequentially in the first quarter of this year, and the ratio of daily to monthly active users has increased. Average revenue per user is growing too, up 25 per cent from the previous year. Advertising revenues shot up 55 per cent, adjusted for constant currency, reaching $3.3bn in the quarter.

However, Facebook's expenses rose even faster. Operating expenses rose 57 per cent, to $1.7bn (excluding share-based compensation). Some of this was expected: Facebook says operating expenses will increase between 50 per cent and 60 per cent this year. This is due to investments in its ad technology and long-term projects such as AI, virtual reality and its internet access project. The cost of research and development in the first quarter more than doubled year on year.

But as Facebook continues in this investment phase, it will need to make a better case that its spending is necessary, rather than extravagant. And if the benefits of these investments take a long time to materialise, Facebook will need to reward shareholders for their patience. Dividends, which Facebook has not awarded to date, might be one place to start. Otherwise the recent travails of Google - which has seen its share price move sideways for the past year due to corporate bloat - may prove a cautionary tale.

Email the Lex team at [email protected]

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation