It's good to be in something from the ground floor. I came too late for that and I know. But lately, I'm getting the feeling that I came in at the end. The best is over.
-- Tony Soprano
Back in February, when Facebook finally dropped its long-awaited IPO filing with our friends over at the SEC, I took a look at the numbers and concluded that the company was in major need of a reacceleration in the monetization of its user base. (See Facebook, Running Out of Bodies, Is in Need of Major Reacceleration in Monetization Rates
Well, just minutes ago, Facebook, filed an amendment to its S-1, providing endless excitement for us data-driven types.
Let's get the mundane out of the way immediately: Yes, Facebook has applied to trade on the Nasdaq
(NDAQ) under the ticker FB.
Now, let's get to the fun stuff. I took a look at the numbers to see if Facebook is looking like a home run like Google
(GOOG) or LinkedIn
(LNKD) -- or a flop like Groupon
First, let's see what's going on with the user metrics.
As you can see, year-over-year growth in monthly average users has dropped off significantly, going from 39% in Q4 2011 to 33% in Q1 2012 -- indicating that yes, Facebook is starting to run out of bodies.
Now, let's look at how well Facebook is monetizing those users by looking at quarterly revenues per monthly average user.
As you can see, it slipped in the first quarter, in keeping with last year's seasonal pattern:
But we can take it a step further by looking at year-over-year growth in revenue per monthly average user:
As you can see, the numbers, particularly in advertising (which accounts for 82% of total revenues), are falling quickly.
Let's hope that acceleration in payments revenue can start to pick up the slack.
And if we look at total company revenues, we can see that year-over-year growth is rapidly decelerating -- it went from 55% in Q4 to 45% in Q1 2012:
So what's going on here?
A few things.
First, Facebook is seeing a significant increase in mobile users. This is good from a platform stickiness perspective.
However, from a financial perspective, it's quite problematic because mobile platforms are less lucrative than desktop-based ones.
Don't take it from me -- you can take it straight from the S-1:
Growth in use of Facebook through our mobile products, where our ability to monetize is unproven, as a substitute for use on personal computers may negatively affect our revenue and financial results.
Secondly, I remain convinced, as I was back in June 2011, that Facebook's increasing reliance upon users from emerging markets is a negative because folks with smaller incomes are less-lucrative advertising targets. (See Why a Facebook IPO Could Flop.
Here's how I put it back then:
So as of now, about 7% of the human race are active Facebook users. That sounds like a low penetration rate (which normally implies a high level of potential growth), but think about these numbers:
1. World Bank researchers concluded that 95% of the developing world’s population lives on less than $10 a day.
2. According to the Food and Agriculture Organization of the United Nations, 925 million people are undernourished.
3. The CIA says that 785 million people can’t read or write.
Now it’s entirely possible that Facebook could eventually grow to 2 or 3 billion users, capturing a big chunk of the 5 billion-plus people using mobile phones, PCs, and other devices.
The problem comes in that future growth in the user base will be coming from less-affluent areas of the world, which means less revenue-per-user.
The latest rumors have Facebook bringing in $2 billion in operating income on $4 billion in revenue this year. Assuming these numbers are true, Facebook is bringing in about $8 for every active user.
The exact numbers don’t matter. My concern is that since Facebook is increasingly reliant upon emerging markets for growth in the user count, that revenue-per-user number is going to drop over time. What may be $10 per user in the United States could easily be $1 in Bangladesh.
So while the user count could theoretically grow six-fold from here, the revenue base may not grow with it.
Remember, the basic Facebook revenue model can be boiled down to this:
Revenue per user times number of users equals total revenue.
And since Facebook is seeing a slowdown in growth in revenue per user, and growth in the number of users, the whole business is slowing down.
So the ultimate risk with Facebook is this: It is coming to market after it's signed up its most lucrative users -- people with money living in developed markets like the US and Europe.
Let's circle back to the beginning of this piece. Is Facebook looking more like Google or Groupon?
Well, like Google, Facebook is obscenely profitable, having generated $1.7 billion in operating income on a $3.7 billion revenue base last year.
But like Groupon, it's increasingly looking like the easy money has already been made by the smart guys that got in at the VC level.
As with every hot new issue, the animal spirits trump all, but for now, Facebook is starting to lose its luster.
Am I crazy? Let me know in the comments section below!
No positions in stocks mentioned.
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