Facebook’s Real Growth “Problem”: The World Just Isn’t Big Enough
Get used to it. From now on you’re always going to hear that “Facebook’s growth has slowed.” You heard it here first: Facebook can’t grow as fast as it did. It simply is running out of human beings on planet Earth.
Before we explain why, let us remind everyone of a fact that’s missing in the media this week: this is still very much a story about a great company, not to mention American ingenuity. The reality is this is a company that went public at the right time for its private investors but at the wrong time for retail investors.
Since the company was so well known to so many potential retail investors, the retail investor demand encouraged the investment bankers and Facebook executives to not leave any money on the table when they went public. They not only didn’t leave any money on the table, they also set themselves up for a tough road ahead on Wall Street – as they are all feeling today.
The story about Facebook’s IPO price is old news. Let’s face it: they didn’t deserve a $100 billion market cap based on their existing financial performance, but as a long term investment this is still an exciting story, albeit with slowing growth.
And they have to slow. There aren’t enough human beings in the world to keep the growth sustainable, particularly since China is still off the market for Facebook.
The world has nearly 7 billion people. Of those 7 billion, only 32% use the Internet, which means there are a little over 2 billion Internet users. Why so small? Roughly 79% of North America uses the Internet, but only 13% of Africa does and only 26% of Asia does. They have a way to go.
With all this taken into account, Facebook just reported that it has 955 million users. That’s almost 50% of the entire worldwide Internet population. And of those 955 million, 552 million are using Facebook every single day.
Facebook’s challenge: how to monetize its huge following on mobile devices. Facebook grew its mobile base to 543 million, a 67% increase year over year. But more people are playing games on mobile instead of at their desktops, and Zynga’s stock tanked this week as it warned that its revenue is declining. It will take time for Facebook to monetize mobile, as a click from a mobile device is less valuable because customers nowadays like to make their purchases from desktops.
But for those investors still holding out hope, look at it this way. Facebook now sports a market capitalization of around $50 billion instead of $100 billion. They are about to cross the 1 billion mark for registered users. Can Facebook earn just $5 a year in profit for every user it has? That would put its shares at just 10x earnings ($5 billion in earnings is 10x its $50 billion market cap). Seems plausible and even doable, especially as Facebook is able to prove its value.
On a bright note for those Facebook advertisers: the company says that it now has independent data from over 60 marketing campaigns showing that 70% of those campaigns provided a 3x return or better ad spend. Better yet, the company says 49% of them provided a return on ad spend of 5x return or better. This provides more proof that Facebook’s demographics can be properly monetized. As more companies see that, instead of the General Motors debacle that we believed stemmed from GM’s poor execution, Facebook will be well positioned for future revenue growth.
So while retail investors certainly don’t LIKE Facebook’s stock performance, the company remains on track to deliver value. Not quickly enough to make Wall Street happy, but since its CEO Mark Zuckerberg controls 57% of the voting power, we’re not too sure he’s concerned about the short term. He’s about to pass 1 billion users for this social media company founded in 2004. The world is indeed flat – but perhaps a bit too small to keep the growth story the center of everyone’s attention.