Facebook Inc. (FB, Financial) continued its record-breaking spree during the first quarter of 2017, hitting $8 billion in revenues, a growth rate of 51% compared to the prior period. Facebook has been growing its revenues in the above-50% range since the fourth quarter of 2015 due to its ever-increasing user base around the world and the steady upward march of average revenue per user (ARPU.)
ARPU and user base are the two most important drivers of Facebook’s revenue growth. The higher the number of users, the higher the sales. When you have the average revenue per user also growing at the same time, it becomes the causative effect of Facebook’s strong double-digit growth numbers.
David Wehner, Facebook’s chief financial officer, warned investors in 2016 the company cannot keep increasing ad load - the number of ads a user is shown - and, as a result, revenue growth rates would slow down.
“Over the past two years, we have averaged about 50% revenue growth in advertising," Wehner said. "Ad load has been one of the three primary factors fueling that growth. With a much smaller contribution from this factor going forward, we expect to see ad revenue growth rates come down meaningfully.”
And there are clear signs of that happening.
Facebook’s ARPU growth rate has been slowly declining for the past four quarters, as shown in the graph above, and it is quite possible that it is close to its top. That means the growth from here might be restricted in comparison to the strong double-digit growth we are witnessing now.
Under normal circumstances, when the ARPU growth rate comes down, it drags the sales numbers down along with it. But Facebook has been reporting 50%-plus growth because its user base growth is more than compensating for the slowdown in ARPU growth.
Surprisingly, despite already having a large user base, Facebook’s user growth has accelerated in the past few quarters. From adding less than 200 million users before the fourth quarter of 2015, the social media giant is now adding more than 200 million users, with the number increasing every quarter. A bulk of the growth is coming from the rest of the world and Asia Pacific, where ARPUs are much lower than those in North America and Europe.
The odds are quite high for ARPUs to stabilize over the next two years and, as a result, sales growth should slowly stabilize at a reasonable level as well.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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