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Facebook Hits 1 Billion Users Mark. So Is That a Good Thing or a Bad Thing?

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Facebook announced a major milestone, and it's time to examine its meaning for investors.

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MINYANVILLE ORIGINAL This morning, Facebook (NASDAQ:FB) announced that it crossed the 1 billion monthly active user mark in September, putting it just behind oxygen and water in terms of importance to human life here on Earth.

But now, the question on everyone's mind: What does this mean for earnings?

Let's break it down.

First, let's look at what a monthly active user ("MAU") is.

From Facebook's S-1:

We define a monthly active user as a registered Facebook user who logged in and visited Facebook through our website or a mobile device, or took an action to share content or activity with his or her Facebook friends or connections via a third-party website that is integrated with Facebook, in the last 30 days as of the date of measurement. MAUs are a measure of the size of our global active user community, which has grown substantially in the past several years.

Sounds good to me.

Given that Facebook crossed the 1-billion mark on September 14, it puts the 30-day measurement window pretty close to the end of the quarter, meaning that we can use it to make assumptions about the company's financial results.

Here's how I break it down.

We'll take one important metric: Quarterly revenue per monthly active user.

Now, since the MAU metric is calculated as of the last 30 days of the date of measurement, I averaged each quarter's reading with the previous one's to try to capture the flow during the whole quarter rather than just the last month. So for Q2 of 2012, I averaged Q1 and Q2's readings. (Note: I also did the math without averaging the MAU numbers; the actual numbers are a little different, but the trend is virtually identical)

So here's how that chart looks over the past six quarters:



According to Bloomberg, analysts expect Facebook to deliver revenue of $1.23 billion for the third quarter.

To earn that much money from 977.5 million MAUs (the average of Q3's 1 billion and Q2's 955 million), Facebook would have to deliver revenue per MAU of $1.26, a number that seems very reasonable based upon recent results. Over the past two quarter, Facebook has averaged revenue per MAU of $1.24. Over the past four quarters, it's been $1.28.

So as much as I'd like to view that 1 billion MAU number as negative relative to expectations (I am short Facebook -- please read on for why), the math just doesn't add up.

Yes, it points to dramatically slowing year-over-year growth in MAUs, as you can see here:



But investing isn't about deciding about what's good or bad -- it's about what's priced in and what isn't, and when people will start caring.

Everyone in the universe already knows that Facebook's user growth has been dramatically slowing, which brings us to the other side of the equation: Monetization.

Facebook hasn't hidden the fact that it's had difficulty making money off of its rapidly growing mobile user base.

But wait! A few months ago, Facebook got busy stuffing ads into users' mobile news feeds in an effort to bring home the bacon to a frustrated investor base.
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Position in FB, AAPL.
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