Facebook’s Big Problem

Posted On February 6, 2017 3:07 pm

When Facebook (FB) reported earnings last week it was met with mixed reactions in terms of both stock price and interpretation of the of the numbers. On the positive side most people were blown away by the 54% top line revenue growth; it’s pretty astounding for a company of Facebook’s size, a market capitalization of $380 billion and annual sales of $27.6 billion.

But the main concerns actually also stem from it’s size, namely has it simply grown so big it simply has little room to grow. With over 2 billion users Facebook has pretty much tapped into the most of the Earth’s population interested in using the service. China remains the last and largest green field and that market is proving difficult to tap.

Over the past decade, Facebook has experienced tremendous user growth. This has allowed Facebook to charge more for its ads since there was growing demand from advertisers to get onto more News Feeds and increase their reach. However, as of December 2016, FB reached 1.86 billion monthly average users. With such a massive base of users already, it is difficult for FB to grow its user numbers much further. With roughly 3.5 billion people on the planet having access to the internet, Facebook has already garnered over half of that market.

It could be future growth will come at too high a price, as it will be forced to invest an increasing amount in new technologies and purchases of new platforms. In 2016 Facebook’s capital expenditures nearly doubled to $4.5 billion and company CFO David Wehner guided 2017 will be a year of assertive investment and higher expenses.

And despite the expanding margins, investment seems to be delivering diminishing returns. The average revenue per user in the rest of world category, which includes developing countries, was only $1.41, which is a far cry from the $19.81 for US and Canadian users.

Of course, some prior initiatives that seemed expensive at the time, such as the purchases of Instagram and WhatsApp, have already paid off and have more room to grow.

And certainly Facebook’s push into video, especially live streaming and virtual reality, could provide fuel over the next few years, but there is no guarantee it comes to dominate those areas like it has the friend and family photo sphere. And there maybe some other moonshots up CEO Zuckerberg’s sleeve.

But it would seem its core business is approaching size limit. This is no knock on the company, but until it can display new avenues of growth it’s bigness is a problem and investors should be wary of paying a premium for decelerated growth.

About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.