Facebook (FB, Financial) will be reporting its second-quarter earnings after the market close on July 26. The world’s leading social media application company will be looking to break a few records during the quarter, as this will be the first quarterly report since Facebook crossed the 2 billion monthly active user base count during the last week of June.
Facebook’s quarterly revenue growth rate has stayed mostly around the 50% mark for the past several quarters despite warnings from the management about a slowdown. But as you can see from the chart above, growth rate has been edging a bit lower by a few percentage points.
There are two factors contributing to this.
First, most of Facebook’s growth is now coming from the Rest of the World and Asia Pacific regions, where the average revenue per user is much smaller than the company makes from developed markets. The second factor is that average revenue per user (ARPU), which has been growing along with user expansion, is also coming down. Neither of these metrics are declining drastically, but when compared against Facebook’s past performance, the growth rates of both are slowly inching downward.
ARPU has now moved down from the above-30% growth rate to the above-25% level, and how much it grows during the next quarter will give us a clear indication of how close Facebook is with respect to hitting a ceiling in ARPU.
As an ad platform, Facebook cannot keep increasing the number of advertisements it shows to a particular user; it has to stop at a reasonable level. Considering the past growth rate, though, it is easy to say that Facebook still has some more room to improve this metric, but it will taper off over time.
Second-quarter earnings will give investors a clear picture of how much more bandwidth the company has to improve its ARPU. If the ARPU growth rate comes down sharply, then it will be a clear sign that Facebook’s growth phase has moved down to a more sustainable level, but if it stays put above the 27% range, then Facebook still has the chance to keep it close to the above-average 50% growth rate in terms of revenue.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
