Facebook (NASDAQ:FB) came into its final report on 2018 ready to put a forgettable year behind it. A parade of scandals and privacy concerns -- including the Cambridge Analytica incident, details about Russian meddling, and hate-speech problems -- pushed the stock down 26% last year and prompted a public outcry against the social network.
There were calls to #DeleteFacebook, there was scrutiny of social media's effect on mental health, and CEO Mark Zuckerberg was compelled to testify before Congress. According to a recent Pew Research Center poll, 42% of U.S. Facebook users said they had taken a break of several weeks or longer from checking the site, and 26% said they had deleted the app for a period of time in the past year.
However, Facebook's report showed that all that talk about deleting Facebook and the backlash against the social media giant was just that -- talk.
Instead of a decline in users, Facebook posted 9% growth in daily active users (DAUs) to 1.52 billion from the previous year. In North America, the company's most profitable market, for the first time in a year DAUs increased from 185 million to 186 million.
While concerns about plateauing user growth at home may still be valid, the real reason Facebook's domestic growth is slowing is that it's simply running out of new users. There are only about 360 million people in North America, and many of them are children or among the estimated 11% of adults who don't use the internet. In other words, over half of North Americans already use Facebook every day, and about two-thirds of them, or 242 million, log on monthly.
In Europe, Facebook's next most valuable market, the company also dispelled assumptions that it was on the decline following the implementation of the new General Data Protect Regulations (GDPR) last May. Although DAUs in Europe dropped to 278 million in part because of GDPR, they jumped back to 282 million in the fourth quarter, and monthly active users rose from 375 million to 381 million. That solid user base helped push revenue up 30% in the quarter to $16.9 billion, easily beating estimates.
Turning the calendar
While 2018 is in the rearview mirror, Facebook still faces plenty of challenges including persistent questions about how the company handles user data. This week, it was revealed the company was paying users to download an app that would give the company access to nearly all the data on their devices.
Facebook is still rapidly adding users in its Asia-Pacific and rest-of-the-world segments as it pursues new growth opportunities, but those users monetize at a much lower rate than in North America or Europe. Its average revenue per user in the fourth quarter was $2.96 in Asia-Pacific and $2.11 for the rest of the world, compared with $34.86 in North America and $10.98 in Europe. Consequently, although three-quarters of Facebook's revenue came from North America and Europe, those regions make up less than a third of Facebook's user base.
The social network has a number of products it's focused on growing next year, including Watch, Marketplace, messaging, and WhatsApp payments, but its biggest potential for revenue growth right now comes from Stories, the video-based format it copied from Snapchat and rolled onto all of its platforms. There are more than 500 million daily active Stories users on Instagram, increasing the opportunity for Stories ads, and the company has just expanded a tool called Automatic Placements that converts Feed ads into Stories ads. Of the 7 million total advertisers on Facebook, 2 million are using Stories, leaving plenty of room to grow.
Still, with user growth slowing in its mature markets, Facebook expects revenue growth to slow in 2019. Remarkably, its 30% growth in the fourth quarter marked its slowest pace ever, but Facebook expects that figure to decline sequentially by mid-single digits in the first quarter and slide further. Management reaffirmed its expectation that operating expenses will rise 40%-50% in part because of investments in safety and cybersecurity.
Facebook's years of blockbuster growth are probably over, but investors had already anticipated that slowdown. As a result, the stock soared when Facebook's fourth-quarter report showed that its user base is more attached to the network than many believed and that the company has several promising products in the pipeline to support its ad business.
Considering its modest valuation, at a P/E of 22, Facebook could still be considered a bargain after the latest update.