Facebook
Wait. What?
I'll understand if that raises some eyebrows. Those of you who've read my columns for a while know I'm generally positive on Facebook. You also know I'm also encouraged by a budding ad platform called Facebook Exchange, which uses browsing data to make display advertising more targeted.
So when fellow financial writer Erik Sherman of CBS Money Watch found that the social network was attracting even fewer unique visitors per month than had been initially reported by Reuters, I was curious but not overly concerned. Instead, in an interview, I promised to take a closer look at Facebook's growth strategy before passing judgment.
Well, Fool, I've run the numbers. They aren't good:
Quarter |
Total Revenue |
Sequential Growth |
Average Unique Visitors |
Sequential Growth |
---|---|---|---|---|
Q1 2012 | $1,058 million | (6.5%) | 160.392 million | (2.69%) |
Q4 2011 | $1,131 million | 18.6% | 164.831 million | 1.44% |
Q3 2011 | $954 million | 6.6% | 162.495 million | Not calculated |
Sources: SEC filings, comScore, and TMF estimate.
Predicting underperformance
While it's not perfectly symmetrical, and we're very early in the public history of Facebook, there appears to be a correlation between unique visitors and revenue growth. More eyes equal more dollars, just as it is with its main digital-advertising rival: Google
Through the first two months of the current quarter, comScore data shows that Facebook was attracting 158.354 million unique visitors per month. What happens if those figures hold? Average visitors would decline about 1.3%. Not good. As you can see, the last time UVs declined sequentially, the social network saw revenue fall more than 6%.
This time, a 3% drop seems more likely. Why? Again, refer to the math in the table. Facebook seems to be on track for a 1.3% sequential decline in unique visitors during Q2. That's about half the decline the social network saw in the first quarter, when revenue declined by 6%.
A 3% drop would keep with the limited amount of historical data we have to this point, which means Wall Street's Q2 projection could be off by double digits. Traders would crush the stock in a sell-off.
Why you might not want to cut and run ... yet
To be fair, there's an important bright spot in that table. While both UVs and revenue declined from Q4 to Q1, a little math shows that Facebook did substantially better at generating revenue per visitor in Q1 than Q3, and nearly as well as in Q4:
Quarter |
Total Revenue |
Average Unique Visitors |
Revenue Per Visitor |
---|---|---|---|
Q1 2012 | $1,058 million | 160.392 million | $6.60 |
Q4 2011 | $1,131 million | 164.831 million | $6.86 |
Q3 2011 | $954 million | 162.495 million | $5.87 |
Sources: SEC filings, comScore, and TMF estimate.
Here's why this matters. Facebook skeptics have long argued that Facebook's weakness is an unproven ability to generate more revenue per active user (REVPAU). So while Zynga
Or at least that's the theory espoused by those who see Facebook as just another Groupon
The reality is more encouraging. As the second table shows, revenue per visitor is up versus six months ago. We can probably expect more volatility in future quarters, but that's also due to the nature of participating in (and, to a large degree, shaping) nascent markets.
You have a friend request waiting
Does that make Facebook a Rule Breaker? Possibly. Either way, it pays to study disruptive technologies such as social media, since, over time, the market rewards those that lead the rebellions. These are the sorts of companies that we look for in our Motley Fool Rule Breakers newsletter service. Want in? Check out a 30-day trial subscription. If that's not up your alley just yet, you can still check out a free special report showing you how to invest in the next trillion-dollar revolution.