3 Reasons to Not Give Facebook a Like

Zuckerberg's seen enormous growth and the stock's responded accordingly, but can that growth continue?

Jan 3, 2014 at 10:00AM

Facebook (NASDAQ:FB) has 1.2 billion monthly active users. That's roughly 15% of the entire world. Facebook saw revenue rise 60% year-over-year in its most recent quarter. If that isn't enough, Facebook had $9.33 billion in cash and marketable securities at the end of its most recent quarter. All good things, right? Kind of. Facebook has seen unimaginable growth in the past years, but continuing at that rate is nearly impossible. Due to its declining teenage user base, failed acquisition of Snapchat, and trade off between monetizing the site versus remaining popular among teenagers, Facebook will not continue to grow at its inconceivable rate.

Declining teenage use
Teenagers are constantly looking for ways to express themselves. At Facebook's inception, this was the perfect place. A site where college students were able to network with friends and others who shared similar interest, post photos, and express themselves via updating a status created the ideal location for this form of communication. This basis has propelled it to the No. 2 most visited website in the world . However, recently Facebook has seen a declining teenage user base. From Q2 to Q3, Facebook saw active use among 16-19 -year olds fall from 62% to 52%, and active use from 20-24-year olds fall from 63% to 52%. Conversely, 45% of those 65 years or older identified themselves as Facebook users, up from 35% from a year ago, according to a Forbes survey. Why is that?

Facebook, as I previously mentioned, was the superior location to express oneself. That, unfortunately, has changed. Facebook has become the LinkedIn for teenagers. From the fear of colleges and job recruiters searching one's Facebook and discovering lewd photos from Spring Break 2013 to receiving friend requests from older relatives, to Grandma liking some of those lewd Spring Break photos, Facebook has become a place where teenagers are forced to create a more professional image. Facebook is slowly losing its attractiveness for self-expression, and quickly gaining the reputation of "uncool." 

You can't buy cool
When Facebook purchased Instagram for $1 billion in April of 2012, it had only 30 million users. It currently has 150 million monthly active users. With such a large user base, Zuckerberg was able to monetize the entity by allowing clients to advertise on Instagram. In addition to advertisements via photos, Zuckerberg recently rolled out Instagram videos 6 months ago to compete with other video-sharing social media companies, such as Vine. These videos last up to 15 seconds. This created another platform for advertisements.

However, teenagers, the social network's largest user-base, don't like advertisements. Instead of using Instagram, which records 55 million photos on average per day, teenagers have begun to turn to other, advertisement-free platforms, such as Tumblr, Flickr, and Snapchat. In November, Mark Zuckerberg offered to purchase Snapchat for $3 Billion. Snapchat's 23 year-old CEO Evan Spiegel declined Zuckerberg's offer.

What is Snapchat? Basically, it is a system for creating temporary mobile messages, which include pictures and videos, that users are able send to each other and view. After as long as 10 seconds, the images disappear permanently. More than 400 Million messages are received on Snapchat every day. Snapchat has roughly 60 million total installs, and 30 million monthly active users. Snapchat's enormous success is a direct result of users' ability to freely express themselves without fear of insult. In a world where cyberbulling runs rampant, Snapchat creates a safe-haven for users to express themselves via goofy, 10 second videos and photos. Snapchat also has 0 advertisements. That's what teenagers like.

So what?
What does this all mean? Facebook's current popularity stems from the popularity it once had with its teenage user base. Parents and grandparents joined Facebook because their kids are on Facebook. As more teens stray away, Facebook runs the risk of being phased out if they don't have a new generation of users engaging with its platform. As teens stray away, so do companies, which will in turn invest in Facebook's competitors to target the highly sought-after 18-24 year old demographic. This could mean bad news for investors due to the decline in revenue from advertisements, which makes up 90% of Facebook's overall revenue.

Foolish takeaway
Facebook is an extremely successful company that has become ubiquitous in our daily interactions; however its rate of success will heavily decline if the aforementioned trends continue, which should cause long-term investors to be careful. Overall, Facebook is a social media company, and therefore an extremely volatile business susceptible to trends within the enormously unstable teenage interest base.

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Fool intern Timothy Boyle has no position in any stocks mentioned. The Motley Fool recommends Facebook and LinkedIn. The Motley Fool owns shares of Facebook and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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