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Facebook (NASDAQ:FB) shares have traded range bound from $25 to $29 over the last 3 months, mostly on the debate about how well and how quickly the company could monetize its social media platform across its massive membership base. There have been concerns about whether it could stay popular as the fickle ether-world migrates from computers to mobile. Some have argued that young CEO and founder Mark Zuckerberg is wise to take his time and do advertising right to preserve the medium's place atop the hill, but I believe there's less time than one might think to prove to investors that the massive tree will bear its promised fruit.

Below here you will see the last four quarters of Facebook's impressive daily, monthly and mobile monthly average users, and year-over-year user growth. You will note the great heights reached by Facebook, its immense popularity and the impressive growth it has accomplished despite those heights.

 

Q1 '13

Q4 '12

Q3 '12

Q2 '12

DAU

665 Mln.

618 Mln.

584 Mln.

552 Mln.

Yr/Yr %

26%

28%

28%

32%

MAU

1.11 Bln.

1.06 Bln.

1.01 Bln.

955 Mln.

Yr/Yr %

23%

25%

26%

29%

MMAU

751 Mln.

680 Mln.

604 Mln.

543 Mln.

Yr/Yr %

54%

57%

61%

67%

· DAU is Daily Average Users

· MAU is Monthly Average Users

· MMAU is Mobile Monthly Average Users

Recently, there's been some question about the Facebook's ability to keep the attention of trend-seeking teens. Fortunately for FB shareholders, when users do stray, which is not at all apparent in the table above here, young Americans are trending toward Instagram, which Facebook smartly acquired in 2012.

There is also serious concern that incorporating economic value adding advertisements might sour the experience for some users and drive them away. However, if Facebook cannot capitalize on its extensive popularity, its valuation is likely destined to contract. That is because incorporated in the stock price is at most an expectation of it and at least a hope for it. The stock's P/E ratio of 47X the analysts' consensus EPS estimate for 2013 does not represent a conservative value, and reflects a 29% five-year growth expectation by analysts and the investment community, based on data at Yahoo Finance.

Likewise, if Facebook can capitalize more effectively, its valuation could expand and its earnings growth could pick up as well. That would be fantastic news for shareholders. A peer of the company, LinkedIn (NYSE:LNKD), trades at 120X the analysts' consensus EPS estimate for its 2013. However, LinkedIn's recent EPS growth and analyst growth forecasts for the stock are likewise higher than that of Facebook. Though, the return LinkedIn shares have provided is as well. LNKD shares have appreciated in value by approximately 56% over the last twelve months, while FB is down about 30% since the close of trading on its IPO date nearly a year ago.

 

P/E on 2013 EPS

Est. Growth 2013

Est. Growth 2014

5-Yr EPS Growth

Facebook

47

7.5%

35%

29%

LinkedIn

120

63%

45%

58%

Facebook should be able to add economic value for its shareholders, but my concern is that it may come late. I point to Apple (NASDAQ:AAPL) and the company's post-Steve Jobs innovation drought. I believe there was a time when all Apple had to do was introduce a new product into a new product segment (i.e. television) and its share value would quickly reinvigorate. At this point, though, I'm concerned that investor sentiment is being altered and optimism is being replaced with skepticism about what Apple can do moving forward.

All one needs to do is to look at the record of MySpace, AOL (NYSE:AOL) and other once wildly successful technology predecessors to Facebook to see the less than optimal scenarios that could play out for Facebook over time as well. I used to joke with a friend that Facebook will be replaced by the hologram concept of some kid before long, unless I've just given the idea to Zuck. Lord knows he has the resources now to make a go at it.

Facebook has picked up the pace after disappointing investors post its IPO and losing the backing of an important advertiser soon thereafter as well. Due to the migration of computing to the mobile platform, Facebook has transitioned to feed based advertising, which more seamlessly incorporates advertising into the social media platform than traditional banner ads. It also allows for more efficient use of the smaller mobile device screen. As a result of both the general migration and the changes Facebook has made, mobile revenue have grown as a percentage of total revenue.

In its effort to reassure corporate America of the viability of its platform for advertising, Facebook acquired Atlas from Microsoft (NASDAQ:MSFT). Atlas is a digital advertising service that measures the effectiveness of online advertising. More recently, Facebook engaged with Wal-Mart (NYSE:WMT) in an extensive advertising program on the mobile platform. Facebook ran approximately 50 million ads for Wal-Mart through the holiday shopping season. The results were mixed, as the program did manage to engage users while also drawing some complaints, but change is rarely seamless.

Facebook is also working on "custom audience," which touches on controversial privacy issues since it uses data about users along with advertiser data to better target ads for specific users. Since October, the company has also been employing app install ads, which is in use in 20% of the highest grossing iOS apps in their efforts to speed adoption.

Finally, about a month ago, Facebook introduced Facebook Home, a Facebook-centric home page for Android phones. In my view, it's Facebook's way of taking its web within the web to the mobile space, its effort to keep users doing everything they do through Facebook. There have been mixed reviews so far, but Facebook offers updates monthly in its effort to constantly improve the program. With this effort, if successful, Facebook threatens Google (NASDAQ:GOOG), in my view. That's a big if though.

So about how much time does Facebook have then to make big gains in monetization and solidify itself with investors and as a mainstay on mobile and the rest of the web? Well, I suspect that if membership growth comes into question first, it will be too late. As you can see in the first table, growth is inevitably slowing as the Facebook user base rises to preposterous heights. Okay, so maybe it's not inevitable, but it is becoming clear that China is not open for discussion. India will likely give birth, if it has not already, to its own social networks similar enough to Facebook to grab significant market share. The same as Google has to deal with Baidu (NASDAQ:BIDU) and others, Facebook will have its rivals in Asia, despite its brand appeal and its Hollywood PR lift. All of the world's 7 billion people are not available to Facebook, and the company is already reporting over a billion monthly average users. So at some point, there must be a significant slowdown in user growth, and God forbid, even user attrition. That is precisely what would terrify investors though. If the user base begins to face question, so will Facebook's valuation potential and investor faith in the management team's skill in monetization. I suppose the real long-term key for Facebook will be in becoming more than trendy, but a mainstay in our lives. So, in conclusion, while I like Facebook here on the prospect of monetization and the value it could add quickly to approach and surpass LinkedIn, I hope for shareholders' sake, management realizes that time is of the essence.

Source: Facebook Must Monetize Before Membership Growth Becomes An Issue