by Marc Bastow | May 17, 2013 11:27 am
If the Facebook (FB) IPO wasn’t the most anticipated stock event of the 2012 calendar year, I couldn’t say what was.
Remember the hoopla and anticipation? We thought it worthy of an entire section dedicated to the May 18, 2012, event, which hit like a hurricane.
And not in a good way.
Facebook has recovered a bit from its four-month plunge that saw it fall from a list price of $38 and first-day intraday high of $45 to below $18 — it now is trading north of $27 after topping out in the low $30s during late January.
But as we approach the company’s one-year anniversary, many can’t help but wonder where it goes from here. For my money’s worth, though, I think Facebook is stuck …
Its User and Revenue Growth Continues to Decline: Both revenues and monthly active users have increased year-over-year from fiscal year-end 2009 to 2012.
The problem? The rates of growth are slowing.
|2009||2010||Growth Rate||2011||Growth Rate||2012||Growth Rate|
|Source: FB10K Filed 2/1/13|
And by its own admission, the trend is expected to continue:
“While our periodic rates of growth may be flat or increase from time to time, we expect that our user growth and revenue growth rates will decline over time as the size of our active user base increases and as we achieve higher market penetration rates.”
More simply put: There is a finite number of Internet users around the globe, and a smaller number of people who will use Facebook. No one knows what either number is, but FB knows it’s getting much closer to that number — and slower growth is inevitable.
The big question, then, is how and when those slower user growth rates will start to creep into the balance sheet. So far, things seem OK: First-quarter 2013 revenues grew 37% year-over-year to $1.46 billion to edge out Street estimates. Although, Wall Street analysts expect 2013 revenue growth to clock in at 32% … and then 25% in 2014 …
It this trend a harbinger of doom? No. But it’s not a good sign, either.
Margins Continue to Get Squeezed: As a dynamic organization, FB understands the need to spend money on infrastructure and people. It’s necessary, but it’s also a weight on the bottom line — something to really be mindful of if that top line starts to give way.
Both cost of goods sold and SG&E costs have grown over the past three years, coming in at a combined 36% in 2010, 42% for 2011 and 62% in 2012. The net result was a decline in Facebook’s non-GAAP operating margins from 53% in FY2011 to 44% in FY2012.
Those margin pressures are starting to show up on the bottom line. While Q1 2013 revenues improved YOY, non-GAAP operating margins were squeezed to 39% compared to 46% in the year-ago period. The result was net income was flat YOY, coming in at 9 cents per share on both occasions. On an adjusted basis, Facebook’s 12 cents per share were a penny shy of estimates by Thomson Reuters-polled analysts.
Moreover, FB provided guidance suggesting continued spending increases that could cut into future margins. I don’t like the sound of that.
Mobile Just Might Work: It’s no secret that PC growth is slowing at the expense of mobile, and FB is banking on capturing a greater share of its revenues from this switch.
If the past few quarters are any indication, it’s on the right track. Mobile ad revenues made up nearly 30% of total Facebook revenue in Q1 2013, up from 23% in Q4 2012 and 14% in Q2 2012.
Meanwhile, the number of users who logged onto the site through a mobile device of any kind more than doubled YOY. The quarterly trend can be seen to the right:
FB’s own research suggests a global MAU market at the end of 2012 of nearly 700 million, so the company still has room to grow the mobile platform. And it has to — that’s where the future is, no doubt about it.
The “Z” Factor: Co-founder Mark Zuckerberg founded the world’s biggest social network from his dorm room at Harvard, and he went from naive, idealistic programmer to cutthroat, monetization-minded CEO in a year. If you’re counting Facebook out, you have to count Zuckerberg out, too, and that’s no light judgment.
Considering how Facebook’s IPO went down (namely, poorly and crookedly), it’s difficult to tell whether investors will ever wholly trust the company again. That in and of itself doesn’t make Facebook unworthy of investment — but combined with an increasingly saturated market and a slowing of the top line … well, that’s enough to give me pause.
Facebook is high-profile enough, and expectations are enough that big headlines could pop the stock at times and kneecap it at others, but broadly speaking, FB stock likely has peaked for the time being.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities.
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