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Facebook (Nasdaq: FB) has certainly been a growth story for several years. The company has turned its large and engaged online user base into considerable revenues in short order.
However, as Facebook matures and becomes a grown-up company, the challenges are mounting. Perhaps the biggest challenge to the company is the law of large numbers. This means that as the company grows its revenues, it becomes increasingly tougher to increase (or even maintain) its growth rates.
In the early stages of many companies, it is relatively easy to achieve “hockey stick” growth rates that seem to go up in a straight line. For a company with $100 million in revenues, increasing revenue by $70 million means a 70% growth rate. However, if a company with $500 million in annual sales expands its business by $70 million, the resultant growth rate is just 14%.
There is no doubt that Facebook is still growing its revenues and profits. However, the problem is that the company’s growth rate seems to be slowing down quickly.
Facebook Growth Rate Slowing
|
|
2008 |
2009 |
2010 |
2011 |
|
Revenue * |
$272 |
$777 |
$1,974 |
$3,711 |
|
Revenue Growth ** |
78% |
186% |
154% |
88% |
|
Profit * |
($56) |
$229 |
$606 |
$1,000 |
|
Profit Growth ** |
NA |
NA |
165% |
65% |
|
|
|
|
|
|
|
* Revenues and Profits in millions ** Growth rates are year-over-year |
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|
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Most companies would kill for 88% revenue growth and 65% profit growth over the last year. This is nothing to scoff at – Facebook sales numbers have been impressive. But the numbers from 2007 through 2011 paint a picture of slowing growth at Facebook.
An even greater concern is the more recent performance. This includes:
- Q1 2012: Year-over-year revenue growth of 44%
- Q1 2012: Sequential revenue declined by 6% (compared with Q4 2011)
- Q1 2012: Sequential profits declined by 32% (compared with Q4 2011)
- Q4 2011: Sequential revenue grew by only 19% (compared with Q3 2011)
While the annual year-over-year growth rates still look impressive (even though they are slowing), the past couple quarters look pretty dismal. The fact that sequential revenue growth was just 19% in the final quarter of last year is truly unimpressive for the most hyped IPO ever. Additionally, Facebook’s revenue declined on a sequential basis for the very first time in Q1 2012.
The simple fact is that Facebook’s rate of growth is slowing down. In part, this is due to the law of big numbers. However, the quickly falling growth rates also raise questions about user penetration rates (particularly in developed world countries in North America and Europe) and the effectiveness of the company’s advertising offerings.
For investors, Facebook has been pitched as a high-growth stock on the verge of explosive growth. And the stock was certainly priced based upon this expectation.
On an annual basis (i.e., comparing 2011 versus 2010), this appears to be the case. However, as investors we need to examine not only what has happened in recent years, but also what has happened in recent quarters. And even more importantly, we need to understand what might happen next.
The numbers disclosed by Facebook in public filings appear to indicate a rapidly slowing rate of revenue growth – from 154% in 2010, to 88% in 2011, to 44% in Q1 2012. Is 44% revenue growth what can be expected from Facebook in 2012?
The two investment bank analysts who follow Facebook have estimated 2012 revenues of $5 billion – or a 35% increase over 2011. At least these two analysts think that the company’s growth will continue to moderate throughout the year.
To read more about the Facebook IPO and the five red flags that should keep you from investing in this overpriced stock, click on the following links:
Five Reasons to Avoid Facebook (FB) Shares