Facebook: Don't Fear Adulthood

Feb. 08, 2017 11:02 AM ETMeta Platforms, Inc. (META)7 Comments

Summary

  • Facebook is slowly maturing, and I don’t see the upcoming transition into “adulthood” as a bad thing.
  • Revenue growth is expected to slow down in 2017 – not every company can grow top line at over 50% indefinitely.
  • I believe Facebook will still have plenty of opportunities to increase ARPU and combat an eventual slowdown in monthly user growth and ad load.
  • Lower valuation multiples suggest lower risk to owning shares at current levels.

Only five years after its IPO, Facebook (NASDAQ:FB) is showing early signs of approaching maturity. Growth investors, however, should not be too concerned about it.

Credit: NBC News

First, it is true that ad load is projected to cool down later in 2017 and that the user base needs to start growing at a slower pace eventually. But I remind readers that a company cannot continue to increase its top line at over 50% indefinitely. Second, the upcoming revenue growth slowdown comes accompanied by positive, partly offsetting factors that should not be ignored. Monetization opportunities and a more conservative stock valuation are a couple of them.

On monetization

The graph below illustrates Facebook's historical MAU (monthly average user) and ARPU (average revenue per user) YOY growth. Notice how MAU has increased consistently for the past several quarters, but at a mid-teen level. Meanwhile, ARPU growth has remained very strong, mostly above the 30% mark.

Source: DM Martins Research, using data from company's SEC filings

As I have argued in the past, user growth is only likely to decline over time as Facebook's platforms reach scale. If you don't agree, think about the math behind it: should the current MAU growth rate of about 17% remain constant, Facebook would have the whole world teenage and adult population who live above the poverty line logging into its platforms at least once a month by as early as the end of 2020 - a very unlikely scenario. I expect, therefore, the blue line above to soon turn the other direction and start to dip slightly but consistently.

I believe, however, that Facebook still has plenty of opportunities to execute on monetization initiatives (i.e. to further increase ARPU), ideally enough to counter an eventual decline in user base growth and ad load.

Per Facebook's

This article was written by

DM Martins Research profile picture
20.45K Followers
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.

- - -

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.

- - -

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 am/we are long GOOG. 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.

Recommended For You

Comments (7)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.