Facebook: 955M Monthly Active Users Is An Overestimate

| About: Facebook (FB)

The media, including Facebook (NASDAQ:FB), has extensively reported about the social network's 955 million active users.

Facebook brakes down its 955 million MAUs as follows:

  1. U.S. and Canada: 186 million
  2. Europe: 246 million
  3. Asia: 255 million
  4. Rest of the world: 268 million

However, when you closely analyze Facebook's filings with the SEC, the company explicitly states that about 8.7 percent of its users are "fake." They even break it down into three categories:

Duplicate accounts: 4.8 percent

User-misclassified accounts: 2.4 percent

Undesirable Accounts: 1.5 percent

Duplicate accounts applies to individuals who maintain one or more Facebook accounts, while user-misclassified accounts are profiles for a business or non-human entity, and undesirable accounts are exclusively used for spamming.

With that said (and assuming Facebook's estimates are accurate) the number of monthly active users is about 872 million, still the largest number of users of any social network. "So, what is the total number of fake accounts, you inquire?" The total number of fake accounts is about 83 million assuming Facebook's 8.7 percent estimate for bogus accounts.

Daily Active Users (DAUs)

Facebook brakes down its 552 million DAUs as follows:

  1. U.S. and Canada: 130 million
  2. Europe: 154 million
  3. Asia: 129 million
  4. Rest of the world: 139 million

According to Facebook's filing, in June 2012, the number of DAUs was 552 million. However, later in the filing they disclose that due to "uncertain metrics" they estimated this figure to be closer to 525 million.


1. The number of fake accounts might to continue to increase in the future. For example, back in March the company's estimated percentage of fake accounts was between five and six percent, compared to over eight percent as of the most recent quarter. If this trend continues, the percentage of fake accounts could reach the ten percent mark by year's end. This worries me. Here's why:

If advertising companies are spending a specified dollar amount on the Facebook platform, they most likely have a target as far as revenue per user that they must hit. Due to the bogus accounts, the revenue per user will be lower because the denominator is overstated. This may cause companies to conclude their advertising efforts on Facebook are fruitless and therefore take out their money and spend it with Google (NASDAQ:GOOG), for example, which is expected to beat Facebook in display advertising by the end of this year.

2. Approximately 81 percent of the company's monthly active users are outside the U.S. and Canada, thus advertisers may not find these users economically attractive, which can lead to lower advertising revenue from developed countries. This is not to say these users generate no revenue for Facebook because some international advertisers use the platform to reach local customers in these regions. The risk here is that Facebook has penetrated most developed countries so its user growth is coming from developing countries, which are known to have less disposable income. As a result, I believe revenue will not grow as fast as in the past.

Dire Need for Improvement

As you may already know, a solution for mobile monetization has yet to be found. In addition, Facebook earns less revenue per user relative to Google and AOL (NYSE:AOL), yet the market is compensating Facebook with more attractive trading multiples. My hypothesis is that the market will eventually reconcile the difference and Facebook will trade at lower multiples.

Nevertheless, a bigger concern is the uncertainty of the validity of some of the metrics used to capture the number and the exact location of users on the platform.

"Our metrics are also affected by applications on certain mobile devices that automatically contact our servers for regular updates with no user action involved, and this activity can cause our system to count the user associated with such a device as an active user on the day such contact occurs."

"In early June 2012, we discovered an error in the algorithm we used to estimate the geographic location of our users that affected our attribution of certain user locations for the period ended March 31, 2012."

It is very helpful for the company to continue fixing these glitches and provide advertisers with rich, clear, and more actionable data to keep them from switching to other competitors. I believe having better information about its users will give Facebook a competitive advantage they can leverage to gain more advertising revenue. Nonetheless, for the moment, I am not comfortable investing in a company whose user data is inaccurate, which inherently possesses a high risk to my returns.

Disclosure: I 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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