In 2011, Facebook's (NASDAQ: FB) total net income was $1 billion. Fast forward to 2017 and the social network could very well generate over $10 billion in profits this year alone. Here's a look at the company's skyrocketing growth -- and how the social network is turning into such a heady cash cow.
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From $1 billion to $10 billion
Facebook's growth has surprised everyone, sending shares up 227% since the company went public in 2012. The company's user, revenue, and profit growth have arguably all surpassed expectations. But Facebook's growth in profits may be most impressive.
While Facebook's 10-fold increase in net income since 2011 helps capture the incredible trajectory of the social network's rising profits, it's worth emphasizing that the social network's extraordinary bottom-line growth rate has accelerated recently. For instance, Facebook's earnings per share has increased at an impressive average annualized rate of 49% during the past five years, but Facebook's trailing-12-month EPS jumped an astounding 160% during a period when revenue increased 55%.
Facebook can thank its impressive operating leverage for its recent outsized EPS growth. During the trailing 12 months, Facebook benefited from its ability to scale its operations. While Facebook's operating expenses increased in 2016, the company's advertising revenue grew at a much faster rate as the company continued to improve its ad products and significantly increased its ad load. Profits subsequently soared.
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Following a massive, trailing-12-month leap in earnings, Facebook's net income growth is on pace to surpass $10 billion this year. In Facebook's third quarter of 2016, net income was $2.4 billion -- and fourth-quarter net income will likely exceed $2.5 billion, putting net income at a $10 billion annual run rate. Of course, Facebook's quarterly net income will likely continue to grow in 2017, even making $10 billion a conservative estimate for the company's 2017 net income.
Sponsored video advertisement on Facebook. Image source: Facebook.
Expect growth to decelerate
But investors shouldn't get too used to Facebook's recent growth. Facebook management warned in the company's third-quarter earnings call that it expected its revenue growth rate to slow in the fourth quarter as Facebook laps its strong fourth quarter in 2015. Further, management said it expected revenue growth to "come down meaningfully" during the second half of 2017 as year-over-year increases in ad loads drop off. Finally, management also said it anticipates 2017 "will be an aggressive investment year" as the company continues to focus on adding expensive top engineering talent.
Therefore, as Facebook's revenue growth slows and the company's operating expenses increase sharply, the social network's bottom line growth will slow, too. Still, Facebook's ability to get to $10 billion in net income so quickly highlights management's prowess is making lucrative investments, and it bodes well for the company's future.
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