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After the close on Wednesday, Facebook (NASDAQ:FB) reported earnings for Q4 2012 that generally beat expectations of the market. Investors though need to be careful; the company is still focused on monthly active users (MAU) and not total usage. The real story isn't the monetization of active users, but rather the ability to keep those users active on the platform. The market isn't telling that story.

As discussed back after the Q3 report, the company faces two issues mostly ignored by the market: surging costs for the new products and a saturation of MAUs in the most valuable US market.

A few charts below will highlight how the social media giant can add the next billion users in the rest of the world, but if the first billion users drop off as SocialBakers is beginning to show, the stock will not maintain this lofty valuation.

Q4 2012 Highlights

Below are the highlights for the Q4 earnings report:

  • Monthly active users (MAUs) were 1.06 billion as of December 31, 2012, an increase of 25% year-over-year.
  • Daily active users (DAUs) were 618 million on average for December 2012, an increase of 28% year-over-year.
  • Mobile MAUs were 680 million as of December 31, 2012, an increase of 57% year-over-year.
  • Mobile DAUs exceeded web DAUs for the first time in the fourth quarter of 2012.
  • Mobile revenue represented approximately 23% of advertising revenue for the fourth quarter of 2012, up from approximately 14% of advertising revenue in the third quarter of 2012.
  • Non-GAAP operating margin was 46% for the fourth quarter, compared to 55% for the fourth quarter of 2011.

Not highlighting the sequential changes in the MAUs and DAUs is very telling as well as the large decline in operating margins. Regardless of the surging revenue, the company is unable to push that growth to the bottom line where earnings only increased from $0.15 to $0.17.

Soaring Costs

While analysts and the media continue to obsess about mobile revenue growth, a big issue that has popped up and remains is the huge increase in costs. While revenue only increased 40%, non-GAAP expenses increased by 67% over last year to $849M. The company grew headcount by 44% over last year to 4,619 at the end of 2012. All of the new products including mobile, Graph Search, and Facebook Ad Exchange added to revenue, but it all came at a huge cost.

North American MAU Growth Stalling?

The story that isn't told is that the MAUs in the US and Canada appear to have maxed out. Total users only grew 8% over last year. As the charts from the earnings presentation show, the company is very reliant on revenue from the domestic base of users that SocialBakers reports peaked in December.

Chart I - Millions of MAUs

(click to enlarge)

Chart II - Average Revenue per User

(click to enlarge)

A domestic user is nearly 10x more valuable than the users being added in Brazil and India. Those countries will bring on the next billion users, but it will take roughly 7 users in those locations to replace 1 lost user in the US.

Conclusion

Facebook has a huge valuation issue that should crumble after the market moves beyond the revenue growth. The current valuation of $67B remains lofty for a company with the important usage base stalling while spending faster than revenue is growing.

The ability to quickly transition the company to monetize mobile was remarkable. Unfortunately, it came at an extreme cost. More than 1,400 employees were added to the swelling employee base to generate the huge revenue growth.

As mentioned in the past, Facebook remains the ultimate long-term short as a lot of investors and the media continue to focus on the growth of the user base and mobile. When will it hit 2B users? How about 5B users? The real question is whether it can keep the first billion users that account for 50% of the revenue base.

Source: Facebook Remains A Short For 2 Prime Reasons

Additional disclosure: Please consult your financial advisor before making any investment decisions.