Facebook: Don't Expect Endless Growth


  • Facebook is the only company in its peer group that has been able to accelerate the growth rate of its user base over the past few quarters.
  • However, I believe this trend to be unsustainable in the medium and long terms.
  • Soon enough, all eyes will turn to monetization of the user base.
  • Can FB generate enough revenue per user?

Facebook (FB) is on a roll. The company delivered the quarter of any CEO's dreams last month. It beat consensus on top and bottom lines, grew MAU (monthly active users) double digits and generated over $1.8 billion in free cash flow. FB outperformed on nearly every metric tracked by investors and analysts.

Credit: The Wall Street Journal

What intrigued me the most, however, was the growth rate in ad revenues. A 56.8% YOY increase in sales in 1Q16, tied for the highest since 3Q14, suggests that FB is far from showing signs of a slowdown. Digging deeper, I noticed a very interesting fact: FB is the only company within its peer group that has managed to grow its user base at an accelerating rate in the past several quarters. The chart below compares the growth of FB's MAU against that of LinkedIn's (LNKD) unique visitors, Netflix's (NFLX) domestic subscribers and Twitter's (TWTR) MAU. As early as 1Q15, FB's user base was growing at the slowest rate among its peer group. In 1Q16, the Menlo Park company turned the game around and grew MAU the fastest, in a steadily increasing trend.

Source: DM Martins Research, using data from SEC filings

But FB is unlikely to grow indefinitely

The graph above, however, also tells a less encouraging and more sobering story. It is unlikely that FB, or any other growth company for that matter, will be able to sustain this level of MAU expansion into the longer-term future. NFLX, LNKD and especially TWTR have all started to experience an expected slowdown in their user base growth.

In fact, as I stated earlier this year, a social media company, even one as dominant as FB, can only attract so many revenue-generating users into its platforms. I believe this number to be close to 3.5 billion individuals

This article was written by

DM Martins Research profile picture
Tracking Economic Inflection Points To Guide Your Asset Allocation Strategy

Daniel Martins is a Napa, California-based analyst and founder of independent research firm DM Martins Research. The firm's work is centered around building more efficient, easily replicable portfolios that are properly risk-balanced for growth with less downside risk.

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Daniel is the founder and portfolio manager at DM Martins Capital Management LLC. He is a former equity research professional at FBR Capital Markets and Telsey Advisory in New York City and finance analyst at macro hedge fund Bridgewater Associates, where he developed most of his investment management skills earlier in his career. Daniel is also an equity research instructor for Wall Street Prep.

He holds an MBA in Financial Instruments and Markets from New York University's Stern School of Business.

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On Seeking Alpha, DM Martins Research partners with EPB Macro Research, and has collaborated with Risk Research, Inc.

DM Martins Research also manages a small team of writers and editors who publish content on several TheStreet.com channels, including Apple Maven (thestreet.com/apple) and Wall Street Memes (thestreet.com/memestocks).

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.

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