Facebook: The Growth Paradox
Summary
- Facebook's user growth is slowing down in the United States, its biggest source of revenue.
- However, we expect to see an acceleration in user growth and ARPU in developing countries. This is backed up by population and GDP forecasts.
- Facebook's biggest asset is its users, which it has just begun to monetize worldwide.
Thesis Summary
Facebook, Inc. (FB) has been one of the most successful companies of the last decade, and through its social media platforms, it reaches all corners of the world. However, analysts are now worried that growth might be slowing down. This is certainly true in Facebook’s main revenue source, the US. According to recent research, in 2021, Facebook’s users will only grow by 0.8%. Part of this can be attributed to the accelerated growth we saw in 2020 due to the pandemic, but this is also a long-term trend that will sustain itself over the coming years. Facebook has already reached its peak levels of penetration in developed markets like the US and Europe, but it still has a lot of room to grow in developing economies.
This is what we describe as the “growth paradox” for Facebook since we see a divergence in user growth between different regions. This also applies to ARPU. In the US and Europe, Facebook has achieved very high levels of ARPU, making these the most profitable regions despite actually having fewer users. In the future, we should see ARPU increase more dramatically in the high-growth areas.
With this in mind, we have made our best effort to calculate Facebook’s future revenues by desegregating revenues by country and determining how users and ARPU will evolve in each geographical area based on population growth, GDP growth and trendline analysis.
Yes, user growth in the most profitable segments is slowing down, but ARPU and users are growing much faster in other regions.
Will this be enough?
Growth Where It Matters
One of the most compelling reasons to invest in Facebook is the fact that it is a household name worldwide. Having a strong presence in developing economies is key because this is where we will see the highest levels of growth in the next decade.
Source: PwC Study
According to a study by PricewaterhouseCoopers, by 2050, India will have surpassed the total GDP of the US. Brazil and Indonesia also stand out as developing nations that will be poised to outgrow economies in the G7. Other smaller, but notable high growth areas will be Nigeria, the Philippines and Vietnam, which according to the study will make the greatest moves up the GDP ranking.
Without a doubt, India, Brazil and Indonesia are the biggest growth opportunities for Facebook, both now and long term, and the company knows this. Interestingly, these are three of the four countries with the most Facebook users in the world. India has 260 million users, followed by the US with 180 million, Indonesia, 130 million, and Brazil with 120 million.
Even though these countries have the most users, most of Facebook’s revenues today come from the United States, Canada and Europe, which combined accounted for 68.37% of revenues in 2020. While ARPU is around $53 in the US, and $16.8 in Europe, for the Asia Pacific and Rest of the World segments it’s around $4 and $2.7 respectively.
I have often seen analysts point this out as a weakness. They would argue that Facebook is growing the most in places where it is not profitable...yet. This is true for now, but if we are to believe the figures from the above-cited study, these countries will be catching up with the rest of the world in the next few years. There’s no reason to believe Facebook won’t be able to achieve higher ARPU as total wealth grows in these regions. If anything, I would argue that Facebook could achieve even higher ARPU (relative to the average income).
Why? Because Facebook has a chance to embed itself in the economic fabric of these economies much more deeply than in developed nations. This is indeed part of the growth plan that Facebook already laid out for India, but I’d say it can also be applied to the other countries I mentioned. To sum it up, Facebook plans to leverage its strong presence as a connectivity tool to engage businesses and entrepreneurs. A big opportunity for Facebook here will be the payment space, and to ensure this vision takes place, Facebook is also personally investing in developing the infrastructure in these countries.
In conclusion, the biggest asset Facebook has is its users, and given the forecasts for growth in the countries where it has the most users, I believe this will be a key area of future revenue and earnings growth for Facebook.
Forecast
With this in mind, the only way to get a true sense of where Facebook’s Revenue per User (RPU) and total revenue will be in 10 years is to break down revenues by country/region and forecast them separately. Here we have forecasted users and average revenue for India, the US, Europe-6 (the 6 countries in Europe with the most users), Brazil, Indonesia, Mexico and Others.
Users in each country are taken from this article, but we do not have exact figures by country for the RPU. We will instead have to assume that, since these countries represent about half of Facebook’s users, they are a good representation of the “region” they belong to.
Therefore, this is our starting point:
Quarterly RPU | Worldwide | U.S. and Canada | Europe | Asia Pacific | Rest of world |
Q4 '11 | $1.38 | $3.20 | $1.60 | $0.56 | $0.41 |
Q4 '12 | $1.54 | $4.08 | $1.71 | $0.69 | $0.56 |
Q4 '13 | $2.14 | $6.03 | $2.61 | $0.95 | $0.84 |
Q4 '14 | $2.81 | $9.00 | $3.45 | $1.27 | $0.94 |
Q4 '15 | $3.73 | $13.70 | $4.56 | $1.60 | $1.10 |
Q4 '16 | $4.83 | $19.81 | $5.98 | $2.07 | $1.41 |
Q4 '17 | $6.18 | $26.76 | $8.86 | $2.54 | $1.86 |
Q4 '18 | $7.37 | $34.86 | $10.98 | $2.96 | $2.11 |
Q4 '19 | $8.52 | $41.41 | $13.21 | $3.57 | $2.48 |
Q4 '20 | $10.14 | $53.56 | $16.87 | $4.05 | $2.77 |
Source: Statista
Country | Region | Population 2019 | Users 2019 | Population 2030 | Est. users 2030 |
India | Asia Pacific | 1340 | 251 | 1,476 | 276 |
US | US and Canada | 331 | 240 | 358 | 260 |
Europe-6 | Europe | 360 | 175 | 364 | 177 |
Brazil | Rest of the World | 206 | 139 | 216 | 146 |
Indonesia | Asia Pacific | 267 | 137 | 293 | 150 |
Mexico | Rest of the World | 126 | 78 | 137 | 85 |
Other | - | 5010 | 1,152 | 5,585 | 1,302 |
Total | - | 7640 | 2,172 | 8,429 | 2,396 |
Source: wordpopulationreview.com for users and OECD for the population. Items in millions.
Note: We have excluded 2020 from these calculations as we believe Facebook had unusually high revenues due to the pandemic, which can be seen as a one-off event. This actually makes the forecast more conservative, given the fact that RPU increased at a faster rate in 2020.
From here, we now need to forecast the evolution of users and the evolution of average revenue per user. The former is the easiest one to forecast, as we will simply assume that users grow in accordance with population growth. In other words, we assume Facebook retains a similar penetration rate over the next 10 years. We believe this is reasonable, given the fact that Facebook has a strong presence in developing economies, the arguments made in the previous section would suggest penetration could increase even further since Facebook is more deeply embedded in the corporate and social fabric of these countries.
The harder part of the forecast is calculating RPU all the way out to 2030. In order to do this, we have taken a couple of steps. First, we have adjusted RPU to each country’s GDP per Capita at 2019 levels. Because we expect wealth to grow at different rates in these countries, we want to forecast the growth of RPU at a static level of wealth, and then apply the expected growth for GDP per capita on top.
With this, we derive a forecast for adjusted RPU up until 2030. This is done with our trademark trendline analysis. Looking at data from the previous 10 years, we can better understand what the “trend” is. We have applied a linear function for the US and Europe, where the RPU growth is slowing down, and an exponential function for the emerging economies, where the RPU is yet to explode. You can see the examples of the US and Indonesia plotted below. Note that all GDP figures are nominal, not using PPP.
Adjusted quarterly RPU ($) | India | US | Europe-6 | Brazil | Indonesia | Mexico |
Q4 '11 | $ 1.20 | $ 4.15 | $ 1.94 | $ 0.66 | $ 1.03 | $ 0.63 |
Q4 '12 | $ 1.32 | $ 5.12 | $ 2.05 | $ 0.82 | $ 1.17 | $ 0.80 |
Q4 '13 | $ 1.62 | $ 7.35 | $ 3.08 | $ 1.12 | $ 1.48 | $ 1.19 |
Q4 '14 | $ 1.96 | $ 10.59 | $ 3.97 | $ 1.17 | $ 1.80 | $ 1.25 |
Q4 '15 | $ 2.28 | $ 15.61 | $ 5.13 | $ 1.32 | $ 2.11 | $ 1.39 |
Q4 '16 | $ 2.67 | $ 22.14 | $ 6.54 | $ 1.63 | $ 2.56 | $ 1.66 |
Q4 '17 | $ 2.98 | $ 28.90 | $ 9.37 | $ 2.07 | $ 2.90 | $ 2.03 |
Q4 '18 | $ 3.14 | $ 35.97 | $ 11.29 | $ 2.22 | $ 3.13 | $ 2.17 |
Q4 '19 | $ 3.57 | $ 41.41 | $ 13.21 | $ 2.48 | $ 3.57 | $ 2.48 |
Source: Author’s work using data from OECD for GDP per capita.
Source: Author’s work
Source: Author’s work
Adjusted quarterly RPU Forecast($) | India | US | Europe-6 | Brazil | Indonesia | Mexico |
Q4 '20 | $ 4.36 | $ 43.72 | $ 13.61 | $ 3.12 | $ 4.50 | $ 3.15 |
Q4 '21 | $ 5.02 | $ 48.65 | $ 15.08 | $ 3.68 | $ 5.28 | $ 3.71 |
Q4 '22 | $ 5.78 | $ 53.59 | $ 16.55 | $ 4.34 | $ 6.19 | $ 4.37 |
Q4 '23 | $ 6.65 | $ 58.53 | $ 18.01 | $ 5.11 | $ 7.26 | $ 5.15 |
Q4 '24 | $ 7.66 | $ 63.47 | $ 19.48 | $ 6.03 | $ 8.52 | $ 6.07 |
Q4 '25 | $ 8.82 | $ 68.40 | $ 20.94 | $ 7.10 | $ 10.00 | $ 7.15 |
Q4 '26 | $ 10.15 | $ 73.34 | $ 22.41 | $ 8.37 | $ 11.74 | $ 8.42 |
Q4 '27 | $ 11.69 | $ 78.28 | $ 23.87 | $ 9.86 | $ 13.77 | $ 9.92 |
Q4 '28 | $ 13.46 | $ 83.22 | $ 25.34 | $ 11.63 | $ 16.16 | $ 11.69 |
Q4 '29 | $ 15.50 | $ 88.15 | $ 26.80 | $ 13.70 | $ 18.96 | $ 13.77 |
Q4 '30 | $ 17.85 | $ 93.09 | $ 28.27 | $ 16.15 | $ 22.25 | $ 16.23 |
Source: Author’s work
We then derive a final estimate for 2030 RPU by multiplying the previously obtained “adjusted RPU” by GDP per capita growth.
Here are the results:
Country | Region | GDP p/c 2019 | Est. quarterly RPU 2019 | Est. GDP p/c 2030 | Est. quarterly RPU 2030 |
India | Asia Pacific | $2,318.03 | $3.57 | $5,312.33 | $40.90 |
US | US and Canada | $64,679.75 | $41.41 | $65,572.63 | $94.38 |
Europe-6 | Europe | $38,581.52 | $13.21 | $44,557.00 | $32.65 |
Brazil | Rest of the World | $10,932.83 | $2.48 | $13,745.37 | $20.30 |
Indonesia | Asia Pacific | $4,438.51 | $3.57 | $8,358.36 | $41.90 |
Mexico | Rest of the World | $12,255.01 | $2.11 | $15,642.34 | $20.72 |
Other | Rest of the World | $9,734.47 | $3.79 | $11,507.13 | $15.52 |
Total | - | $12,062.25 | $8.52 | $14,161.00 | $30.39 |
Source: Author’s work using data from OECD for current GDP and PWC report for 2030 GDP
Lastly, we can calculate total revenues in 2030, we also have a side by side comparison with 2019. Note that the yearly figures are an annualization of the fourth quarter.
Country | Region | Est. quarterly RPU 2019 | Est. Rev. 2019 | Est. quarterly RPU 2030 | Est. Rev. 2030 |
India | Asia Pacific | $3.57 | 3,584 | $40.90 | 45,152 |
US | US and Canada | $41.41 | 39,754 | $94.38 | 98,152 |
Europe-6 | Europe | $13.21 | 9,247 | $32.65 | 23,116 |
Brazil | Rest of the World | $2.48 | 1,379 | $20.30 | 11,856 |
Indonesia | Asia Pacific | $3.57 | 1,956 | $41.90 | 25,136 |
Mexico | Rest of the World | $2.11 | 658 | $20.72 | 7,044 |
Other | Rest of the World | $3.79 | 17,443 | $15.52 | 80,824 |
Total | - | $8.52 | 74,022 | $30.39 | 291,280 |
Source: Author’s work. Items in millions of USD except per user items.
The total in 2019 is calculated based on the global number of users and the global RPU, whereas in 2030 it is calculated as an addition of all the categories. The "Other" accounts for the remaining countries. In 2019 it is calculated as the difference between the total and the figures from the selected countries, whereas in 2030 it is calculated using the estimated number of users and an RPU of the same proportion of the weighted average of the other countries as in 2019.
Takeaway
What is quite striking about this forecast is that the results are very much in line with analyst revenue estimates. If we were to take our final revenue estimates of $291.280 billion and apply today’s P/S of around 10, assuming today’s outstanding shares of 2.4 billion, we would reach a target price of $1213.6/share. This is a price that is supported by both our estimates and analyst estimates. Furthermore, these are only the revenues that Facebook will obtain from advertising through its current operations, assuming not much changes in the next 10 years, which seems unlikely. Facebook also has promising growth projects in AR/VR and the fintech space, something which we discussed in-depth in this article. Therefore, we’d be inclined to say that we expect Facebook to be worth at least $1213 in 2030. This is an attractive return with much more potential upside than downside.
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Disclosure: I/we have a beneficial long position in the shares of FB either through stock ownership, options, or other derivatives. 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.