Despite numerous reports that have documented in detail how the younger generation continues to leave the leading social network, Facebook (FB) continues to deny losing that user base. Even with the questions regarding losing the most coveted crowd in social network land, the biggest risk to a negative investment thesis has been the company's ability to increasingly monetize its existing and slowly growing user base around the world.
Even though Facebook remains in denial over losing the attention of the valuable teen crowd, the stock might be destined for higher levels as investors continue buying it. The real concern for investors should be whether the declining interest by teens will actually impact the company's results.
While Facebook is still gaining users around the world, the main benefit has been from adding to the monetization of existing users. Part of the gain is from better monetizing mobile, but the focus on better advertising tools has naturally led to higher ad levels. The question, though, is whether or not this increased focus will push away users, similar to what helped cause the demise of MySpace. This CNBC interview suggests that the teen crowd is already moving toward Twitter or other services due to more advertising on Facebook.
As long as Facebook can continue squeezing more money out of existing users, revenue should continue increasing, even if the young users leave. As the slide from the Q2 earnings presentation below shows, the average revenue per user (ARPU) in Q2 2013 increased to $1.60 from $1.35 in the previous quarter and slightly topped the $1.54 record in Q4 2012.
Zuckerberg in denial?
For whatever reason, the data doesn't back up the continued claims of Facebook. Mark Zuckerberg made the following statements on the recent earnings call regarding the teen population that isn't backed up by all other research studies:
One specific demographic I want to address is U.S. teens. There has been a lot of speculation reporting that fewer teens are using Facebook. But based on our data, that just isn't true. It's difficult to measure this perfectly, since some young people lied of their age. But based on the best data we have, we believe that we're close to fully penetrated in the U.S. teen demographic for a while and the number of teens using Facebook on both a daily and monthly basis has been steady over the past year and half.
My guess is that Zuckerberg is using semantics in this case. Teens have never claimed to stop using Facebook, but rather the group no longer uses it as much as in the past. Teens going off to college might log on every day to check on old high school friends, but they use the new social networks to communicate with the new college friends. In that way, Facebook might be a utility that remains useful for years, but it isn't likely to take up the majority of teen time going forward.
The next Yahoo! or AOL?
The common theme has been to compare Facebook to MySpace, but the likely comparison at this point is going to be Yahoo! and AOL (AOL) . Both companies had vast networks of users that once dominated the Internet world. In the case of Yahoo!, it is in a battle with Google for the top spot in US web traffic. During July, Yahoo! had the most unique monthly users showing how Facebook can turn into a utility long-term.
Yahoo! has seen success of late, primarily from a set of Chinese assets that have soared in value. The company, though, only has a value of $30 billion, with revenue approaching $4.5 billion this year. For most of the last five years, the stock went nowhere and that's what Facebook faces as it loses the teen crowd.
AOL has a stagnant revenue base as well, but its stock has traded mostly flat due to not having valuable investments. The stock only trades at roughly 1 times sales compared to Facebook now topping 10 times revenue. In addition, AOL has made several untimely purchases that haven't worked out. The big Patch deal is at being partially wound down with up to 500 employees in the unit being laid off.
The big Huffington Post purchase isn't seen as a success and big issues are already popping up regarding the recent deal to buy Adap.tv for $405 million. The company wants to make a push into programmatic video ads, but the Businessweek report suggests that Adap.tv has the most click fraud in the industry. .
For those investors jumping into Facebook at these levels, they need to keep in mind that the revenue base is only equal with that of AOL and Yahoo! combined, yet it has a market cap of three times those companies. Excluding the Yahoo! China investments, Facebook trades at 10 times those market valuations. With the developed world users peaking and the younger generation seeing it as only a utility, Facebook is not a stock to chase. Yahoo! and AOL provide examples when an Internet leader becomes a utility to the teen crowd.
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