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Facebook's (NASDAQ:FB) massive user base is cited as one of the primary reasons to own the stock. With 901 million active users and growing, investors are thrilled at the prospects of future growth and monetization. After all, Facebook has been able to maintain exponential growth and presents a highly visible product. However investors should be mindful of two recent studies before establishing a long position.

Customer Satisfaction

Facebook is, in essence, a consumer products company that revolves around one product from which all of the company's other offerings are based. When consumers don't enjoy using the primary product, investors need to establish other reasons to own the stock. The American Customer Satisfaction Index (ACSI) recently released its E-Business Report for 2012 and the results for Facebook are nearer to MySpace's 2010 number (Myspace is no longer measured) than to its peers such as Twitter, Pinterest, and Google Plus (NASDAQ:GOOG). Even LinkedIn (NYSE:LNKD), more a professional than consumer network, edged out Facebook in consumer satisfaction. In fact, Facebook is among the five lowest-scoring companies of the 230 companies measured in ACSI's reports with a score of 61 out of 100. Comparatively, Google Plus scored a 78 out of 100 albeit from a much smaller user base.

Company

2010

2011

2012

Previous Year % Change

First Year % Change

Social Media

70

70

69

-1.4

-1.4

Wikipedia

77

78

78

0

1.3

Google+

NM

NM

78

N/A

N/A

YouTube (Google)

73

74

73

-1.4

0

Pinterest

NM

NM

69

N/A

N/A

Twitter.com

NM

NM

64

N/A

N/A

All Others

72

67

64

-4.5

-11.1

LinkedIn

NM

NM

63

N/A

N/A

Facebook

64

66

61

-7.6

-4.7

Myspace

63

NM

NM

N/A

N/A

Source: ACSI

Why It Matters

Investors who only look at the size of the potential user base and ignore numbers like the above are missing an extremely important reality; Facebook's user base is not as "sticky" as those of other well covered companies. In other words, there isn't much holding users to Facebook other than the user experience. Sure a lot of people have an account, but what keeps them signing on?

Getting away from the numbers for a moment, the same user-base rationale investors subscribe to companies like Microsoft (NASDAQ:MSFT), LinkedIn (LNKD), and Apple (NASDAQ:AAPL), is also applied to Facebook but shouldn't be. Microsoft is heralded for the company's massive user base in the enterprise market and rightfully so. Imagine a Fortune 500 company switching to a product other than Microsoft Office only to find all of its billions of previous documents and those of their clients not perfectly compatible. A lot of people aren't big fans of Microsoft Office but "Office has become part of the world's furniture" and it gets the job done.

LinkedIn is a highly functional, free, professional, tool serving a user base where millions are looking for an edge in the job market. It doesn't have to wow on features or remain socially relevant because it serves a specific purpose for professionals. LinkedIn doesn't even expect its users to be as active as Facebook does and compensates with several pay offerings. (This is not to suggest LinkedIn should be bought at the current multiple.)

When a customer begins buying music, books, movies, and TV shows on iTunes they are far more likely to continue buying the Apple products. All of this media is now synced with iCloud making it easier than ever to use new Apple products. More importantly, a customer's iTunes library isn't much good outside of the Apple universe. This would normally be a consumer deterrent, but consumers love the products so much it hasn't mattered. In the meantime, Apple can tether consumers to the product line, which helps prevent migration to products outside the ecosystem.

The point is among some well covered companies where user base is a key part of analysis, Facebook's is the least secure and the least relevant because the users simply aren't happy relative to other offerings in the space. Facebook has very little outside of the user experience to retain active users and it is how active those users are that really matters. The company will most likely continue touting the user base in the upcoming conference call, but remember that advertising revenue comes from people signing on, actively using the site, enjoying the experience, and coming back. While Facebook seems ubiquitous, the market will respond in a big way with sites like Pinterest (more centered on interests and event planning), Google Plus (focused around passions), and Twitter (update focused) if Facebook's weakness in user satisfaction continues. Could it be that users prefer more specialized sites tailored to their interests over a jack of all trades?

The Limits on Facebook's Growth

Back to the numbers, there appears to be a ceiling developing over Facebook's growth. In more developed markets where Facebook has penetrated 50% of the market the user base begins dropping. Over the last three months Facebook's U.S. user base has dropped 0.7% and 1.7% over the last six months. While newer markets are still growing at a steady clip, two additional countries where the company has that 50% market penetration have all recorded shrinking user bases (Hong Kong -1.7% and Singapore -1.1%).

Conclusion

While not the end of the world, the above data suggests at least some customers in more developed markets are choosing to leave the site, which is a logical outgrowth of the ACSI survey presented earlier. To assume competition won't continue to spring up is ill-advised in a space with such low entry barriers. Investors should keep a close eye on this potential growth ceiling and ask whether or not the stock is worth the price at 66 times earnings. While Facebook isn't going anywhere, paying 66 times earnings for a company with declining customers in its most developed markets is a risky endeavor.

Source: Facebook: A Shaky User Base And An Emerging Ceiling On Growth