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Forget Cambridge Analytica -- Facebook Has a Bigger Problem

By Rich Duprey – Updated May 16, 2018 at 2:31PM

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The data breach issues pale in comparison to demographic shifts impacting the platform.

Facebook (META -0.54%) stock has rebounded sharply from the hit it took over the Cambridge Analytica data scandal, but the social media platform may have an even bigger problem, one that could make future growth harder to come by: Facebook has reached a saturation point with its core users, and the next generation of teens has other social networks they prefer to use.

It may still carry a lot of weight for some time to come, but while everyone is worried about privacy issues being the main problem for the platform, there are other tidal shifts that could have a more meaningful, long-term impact on the company's namesake platform. 

Four smiling young people looking at a smartphone

Image source: Getty Images.

Millennials really, really love Facebook

It's fairly common knowledge that Facebook is wildly popular with millennials and older folks. Data compiled by Statista found that of the estimated 214 million Facebook users in the U.S., by far the largest percentage of people using the site were 25 to 34 years old. Over 27% of users fell within this age group, leading Statista to dub the platform the social media app of millennials.

Now eMarketer has come along to show that millennials, more than any other age group, also spend the most time on Facebook. Although 57% of 18- to 34-year-olds were using the social media network more than any other app -- Instagram was a distant second with 15%, followed by Pinterest at 10% -- it has also reached a saturation point with that market. eMarketer ballparks that Facebook reaches an estimated 91% of millennials in the U.S. each month.

It also notes that between 2013 and 2017, users 18 and older increased the amount of time spent on Facebook rose from 18 minutes per day to 23 minutes, but forecasts this year it will stay at 23 minutes, the first time it has not risen from the year before.

But teens don't care

Those data points indicate that while Facebook is wildly popular with its core users, it has little room to continue to grow, a problem that could be compounded by younger generations not following in the footsteps of their older siblings or parents. 

Recently investment firm Piper Jaffray released its biannual survey of teen views on social media and found Snap's (SNAP -3.63%) vanishing message app was favored by 45% of teens compared to just 8% who used Facebook. That comports with the Statista data that found that just 3% of U.S. Facebook users, or 6.9 million were aged 13 to 17 years old.

Facebook's struggle to reach this younger market bears out in the platform's quarterly user numbers. Last quarter it notched 185 million daily active users in North America, a 1 million user increase from the fourth quarter, but also the same count it had posted six months prior.

The fourth quarter drop was the first time Facebook had suffered a decline in DAUs in the U.S. and Canada, which was blamed on tweaks it made to its algorithm that led people to spend 5% less time on its service, or some 50 million hours per day.

Couple taking a selfie

Image source: Getty Images.

Reaching its peak

This could create problems for Facebook, which is seen as one of the go-to spots for digital ad dollars, particularly for marketers looking to reach out to millennials.

Facebook generated $11.8 billion in advertising revenue in the first three months of 2018, a 50% increase from last year, but a deceleration from previous quarters.   If the social media site is seeing the primary group of users engaging with it stagnate -- and if there's little chance the next generation of social media users will pick up the app -- Facebook may struggle to sustain its heady growth rates. 

All is not lost for Facebook since it owns Instagram. The photo-sharing platform boasts 800 million monthly users, far more than Snapchat's 200 million or so. More importantly, this all signals a coming realignment for the social network where Facebook shares the limelight with Instagram.

Instagram is becoming a force in its own right, with users expected to grow to almost 930 million by 2021 while attracting 2 million monthly advertisers. eMarketer expects advertising revenue from the platform to double to $10.87 billion by next year.

Facebook is an advertising powerhouse today and will be for a good long time to come. 

But while the market may be worried about its data privacy issues, the real problem for the company could come from changing demographics that cause its main platform to fall out of favor.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Facebook. The Motley Fool has a disclosure policy.

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