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Facebook growth rate depends on users liking R&D

Facebook spent 30 per cent of sales in the first quarter on research and development. That's proportionately about twice as much as Google and 10 times the outlay at Apple. Meanwhile, at 42 per cent, the $230-billion social network's top-line expansion from a year earlier fell slightly short of Wall Street's expectations. To keep the growth rate up, all the R&D investment needs to bear fruit.

Not that Facebook is doing badly. Its revenue growth is astonishing for a company so large. The social network added more users, enticed them to log on more frequently, and squeezed more dollars out of the average user - increasingly on mobile platforms where the company once looked to be struggling. Mark Zuckerberg's firm now has 1.44 billion monthly users, of which 936 million use the service daily.

Yet sales were growing at a 70 per cent clip a year ago, and analysts expected more this time. The strong dollar didn't help. But it's becoming harder for Facebook to find people who have never tried the service or to persuade users to spend even more time on it. This is natural - companies can't grow substantially faster than the underlying economy for ever.

If it is well directed, Facebook's hefty investment will ensure it can grow profitably for years to come. The company is hiring people to develop messaging services, make ads more relevant, and create add-ons like payments systems. It also isn't shy about snapping up rivals. More than half of the quarter's R&D spending was amortisation of intangibles from purchases like WhatsApp. Given Zuckerberg's willingness to buy rivals and the wild success of acquisitions such as Instagram, Facebook's M&A appetite will probably remain strong.

It does costs money, though. Facebook's earnings actually shrank in the first quarter compared to the first three months of 2014. Shareholders weren't too upset - they marked down the stock only slightly on Wednesday evening, and the shares still trade at more than 40 times estimated profit for this year. As long as users like whatever emerges from all that R&D spending, investors may be justified in believing Facebook can grow at a slower but still impressive rate for years to come.