These 2 Facebook Q3 User Metrics Should Bother Shareholders

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By most measures, it was a fairly healthy quarter. Facebook (NASDAQ: FB) was more profitable than analysts had expected, and while the company’s third-quarter revenue fell short of estimates, both metrics were significantly higher year over year. And the company has continued to attract active users of its social media platforms into the fold. The stock’s instinctive sell-off resulting from the gloomy fourth quarter forecast was and still is relatively well contained.

Investors willing and able to look past all of the recent drama surrounding the social media giant, however, may have noticed something in Facebook’s quarterly update that not enough people are talking about. That is, total user growth has slowed to record, near zero levels, while revenue per user appears to have hit a wall.

Could Facebook meet its “as good as it gets” milestone?

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It is not just a rhetorical question. Indeed, given some of the user metrics that Facebook regularly provides to shareholders as part of its quarterly update, this is a very legitimate question worth asking.

Image source: Getty Images.

One of those metrics is the large number of people regularly using at least one of Facebook’s digital sites – Instagram, WhatsApp, and of course, Facebook itself – on a monthly and daily basis. Both numbers were up sequentially as well as year-on-year in the last quarter … again. Daily users reached 2.81 billion, while monthly users reached 3.58 billion in the third quarter of this year. These advancements forward have also pushed the two measures deeper into record territory.

Yet that advance was also the second lowest sequential growth rate (Q2 to Q3) of 1.8% daily users Facebook has seen since collecting and releasing the news … with the weakest growth taking shape in the second quarter of this year when it fell to 1.5%. The sequential growth of monthly users is also decreasing.

Graphic showing Facebook

Data source: Facebook. Chart by author.

In other words, Facebook’s ability to attract new users to its social networking sites is waning. The surge in user numbers brought on by COVID last year is not only enjoying great following, but the increase itself may also have brought Facebook significantly closer to its maximum potential number of regular users. Additionally, although not shown in the image below, user numbers in North America and Europe have stagnated since the start of 2020. Other markets may not be far behind their headwinds. similar.

This slowdown in itself is not devastating. In fact, one would have expected it; there is a limit to the number of people in the world who can and will log into at least one of Facebook’s applications. In addition, the workforce continues to grow.

However, when paired with the other metric in question, slower user growth is of greater concern.

This other metric is Average Revenue Per User, or ARPU. The last quarter’s ARPU of $ 8.18 is 21% higher than the previous year’s $ 6.76. But, for the first time in recent history, Q3 ARPU fell relative to average Q2 user income. That is, revenue per user typically increases in the third quarter compared to the second quarter. Even Facebook’s most valuable users – in the aforementioned North American and European markets – did not generate more revenue in the last quarter than in the second quarter. This is a big deal, as more than two-thirds of Facebook’s business is done on these two continents.

Chart showing the unusual sequential decline in Facebook's average revenue per user (or ARPU) in the last quarter.

Data source: Facebook. Chart by author.

It would be short-sighted to ignore the unusual circumstances of 2020 that persist into 2021. Namely, the pandemic has prompted many advertisers to close their purse strings until there is greater clarity as to the future. When that clarity finally took shape at the end of last year, ad spend rematerialized, in spades. Advertisers are always looking for the optimal spending mix in this so-called “new normal” environment.

The headwind of Facebook’s ARPU is still remarkable, in that it could be a larger clue that Facebook itself is falling out of favor as the preferred advertising medium.

Don’t panic, but watch carefully

That’s not necessarily a reason to empty any Facebook shares you might own … at least not yet. An unusual quarter doesn’t set a trend, and while it’s evidence of an emerging trend, Facebook is preparing for the future by rethinking everything it does and is. For example, the social media platform is investing heavily to become what CEO Mark Zuckerberg describes as a “metaverse company” that serves as a sort of digital host for virtual reality spaces where real people can connect. to each other.

Facebook can monetize this effort by selling (or advertising) virtual goods or experiences. Such a move would also increase demand for the company’s Oculus-branded VR hardware.

Given the sheer uncertainty about this new kind of social media, in addition to Zuckerberg’s acknowledgment that it could take years for a metaverse platform to be ready to go to market, last quarter’s ARPU and the red flags of user growth keep waving. . The Facebook mania may have run its course, ushering in a less impressive new era in the company’s existence. This is a concern simply because investors have never seen Facebook struggle to increase its bottom line. Now they might.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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