Never in my tenure of writing articles on Seeking Alpha have I been attacked more than for my last article when I suggested that the Facebook (NASDAQ:FB) goal of five billion users by 2030 may be unattainable (despite using conservative metrics in my assumptions). For that reason, I decided to re-examine my thesis. As a result of this reevaluation, I have concluded that my original thesis was not only accurate, but if anything, also too conservative.
Now, I am going to be the first to acknowledge that anyone who has held FB's stock has done very well. Too many people who own the stock in its very short history of being a public company claim that Facebook is just starting to ramp up and things will never go bad. History suggests otherwise, and I will delve into that later. But, for now, let us focus on the $332 billion valuation that has priced perfection into the stock price. Those who have bought FB's stock have indeed done very well. Good for them. Investing however is about the future and preservation of capital as much as it is about how well a stock has served you in the past. With that being said, I'm going to once again start by discussing FB's trends, the expectation of five billion users by 2030, and finally what history suggests will happen to Facebook.
Below are the Facebook trends for the past five years. While exhibiting growth that has indeed made shareholders very happy in the past, one needs to review the data and ask if this growth, which the company itself acknowledges is going to slow down, will lend itself to a market capitalization much above the current $332 billion. The company itself has acknowledged that growth has and will slow down. From page 14 of the 2015 annual report:
"We expect that our user growth and revenue growth rates will decline over time as the size of our active user base increases and we achieve greater market penetration."
Data below uses billions for users:
It would not be unrealistic given the company's own admission of trends slowing down to expect the following growth rates in the next three years:
While these growth numbers still indicate future growth, it is a hard argument to justify assigning these numbers to a company with a $332 billion market cap that is priced for perfect execution going forward.
Additionally, with China and India, currently countries that Facebook is not allowed in, future growth is severely curtailed unless either of these countries reverses their decision and allows Facebook within their borders.
In the case of China, Renren, Tencent (OTCPK:TCEHY) (which owns the QQ messaging service) and WeChat are all firmly entrenched. All have well-established footprints with a total of over 300 million monthly users. Sina Weibo (NASDAQ:WB) is another Chinese site that is similar to Twitter (NYSE:TWTR). Even if Facebook is eventually allowed in China, it faces a steep uphill battle to gain any significant market share. The competition it faces is unlike any it has seen before. FB has become successful by creating user engagement. It is not a company that fights and wins its users in markets that are already well established.
In India, the decision to reject Facebook is a recent one and centers around questions pertaining to internet.org. Specifically, India blocked Facebook because it claimed that FB's plans are "illegal that violate net neutrality." Once again, there are already many companies trying to divide up the social media platform and associated services in India. Among them are Simplify360 (simplify360.com), Germin8 (germin8.com) and Blueocean (blueoceanmi.com).
Also of concern are countries where there is already a firm Facebook footprint. Some such as Germany are starting to question Facebook's tactics. Just this past week, as reported in a CNN article, Germany raised concerns about the privacy of Facebook users and opened an antitrust probe.
To be fair, I should mention that Instagram, Messenger, WhatsApp and Oculus are still growing rapidly. The core Facebook service however is the largest and oldest. The challenges of growing the user base, maximizing advertising and income generation as well as minimizing account closures are challenges that all subsidiaries will face in the future. Past growth and success are no guarantee of future success. The current stage of Facebook's growth has the company at an all-important crossroads. Will the growth continue? That question is why the rest of the world matters. The market penetration of the United Sates is quickly reaching a cap. The majority of those in the United States that want to be on Facebook have already signed up.
Five Billion Users
As discussed in my prior article, Mark Zuckerberg has mentioned that his vision for Facebook is to have five billion users by 2030. It has been suggested by some that I do not use this metric because Mr. Zuckerberg's comment may not have been serious or he may have simply been blowing off steam. It has been quite some time since the comment was made however, and there has been no refutation or rebuttal to the comment by Mr. Zuckerberg, so I tend to think that the comment was genuine and truly reflected a belief he has for Facebook's growth.
Regardless of if Mr. Zuckerberg was serious or not, it is important to analyze how much possible growth lies ahead for Facebook. Here is a recap/analysis of how that is more than likely unachievable. All world population data is extracted from the United States Census Bureau.
As mentioned earlier, Facebook is currently blocked in China and just recently in India as well. As a result of that, the population estimates to evaluate the feasibility of Facebook's five billion user claim do not include those two countries. In 2015, FB had 1.6 monthly active users, which translate to 24% of the world's current population. To achieve five billion users, Facebook would need to register 91% of the world's population of all ages in all other countries. But let's not forget that not all of the world population is computer literate, old enough to use a computer or even has a computer or smartphone.
In reality, in 2030, there will be almost 1.6 billion people under 10 and over 75 (1.26 billion under 10 years of age and 280 million over 75 years of age).
From that number, we dismiss half of them (34% of who live in India or China) and another 16% (a very conservative number) for being computer illiterate or not having computer access, that means we are still excluding another 800 million people from the base of potential Facebook users. As a result, we need to reduce the worldwide population able to use Facebook (5.477) by said 800 million, resulting in a new total of 4.677 billion possible Facebook users. So the question arises: How can Facebook sign up five billion users if the universe of possible users is only 4.677 billion? The scenario of five billion users is impossible to achieve.
My last (and favorite) argument revolves around the lessons that history has taught us. These are lessons that Facebook's investors refuse to acknowledge. Investors always look to the past to gain a possible edge on what may transpire in the future for their investments. All companies I'm using are high technology companies that were once industry leaders (sound familiar?). This is not an apples-to-oranges comparison. I'm going to concentrate on what has transpired over the years with Intel (NASDAQ:INTC), Yahoo (NASDAQ:YHOO) and BlackBerry (NASDAQ:BBRY). All are in the technology fields and have to one degree or another had an impact on what has made Facebook the powerhouse that it is today.
Intel made the chips that every computer uses. There will always be a demand, and with Intel being flush with cash, it was the undisputed semiconductor chip maker. No one would ever be able to overtake it right? 16 years after the company's August 2000 share price of $74.88, shareholders are watching shares trade hands for $31.89 as I write this article. That is down 57% from the all-time highs. That is despite having a lower valuation than Facebook (a PE of 35 vs. FB's PE of 82) and having stellar year-over-year earnings growth.
Yahoo used to be the dominant search engine. Coupled with its email and message boards, it was a social media company before social media companies were known. No one could ever compete with it right? 16 years after the company's $108.17 per share valuation, investors are watching shares change hands at $34.81 as I write this article, which is down 67% from the all-time highs despite having a revenue growth that was exceeding FB. Earnings also began flowing for the first time. There was nothing that could stop Yahoo right? Someone forgot to tell that to Google (NASDAQ:GOOG) (NASDAQ:GOOGL).
My favorite history example is BlackBerry. Remember when BlackBerry was the best smartphone on the market? No one ever imagined Apple (NASDAQ:AAPL) would be the force that it is (sound familiar?). The stock went from May 2008's $148.13 to the current $7.60 as I write this article, which represents a decline of 95% despite having a revenue growth that makes Facebook look like a rookie still playing ball in the minor leagues with only aspirations of ever making to the big leagues.
History teaches us valuable lessons, but we need to be open to accepting and acting on these learnings. Facebook has been a terrific growth company and investment. Current trend analysis however suggests that the company's self-acknowledged slowdown in user growth trends will translate into a company that cannot support a $113.05 share price and $332 billion market capitalization, let alone even a significantly higher valuation expected by the minions.
At current levels, Facebook cannot be recommended as a buy or hold. Therefore, a sell or short would be the only logical conclusion.
Also, before the question is asked: I'm not currently short FB. I only play the long side of the equities markets. This article is intended to express my views that FB is no longer an appealing long-term purchase. I personally do not, have not, and likely never will short FB or any other stock.
Disclaimer: Investing in stocks such as Facebook can be risky. There is no guarantee that your investment will be safe. There is also a great likelihood that you may lose some or all of your investment. This is particularly important when considering the shorting or any stock. Please do your own due diligence before investing in Facebook or any other investment. Information provided in this article is informational and should not be the sole guide to determine if investing in the company is appropriate for you. The above are my opinions and should not be the sole purpose for initiating a trade. Always do your own due diligence prior to investing. Also remember to only initiate trades that are within your pre-defined risk parameters.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.