Facebook increasing user numbers, but paying more for each user

Facebook released its Q1 earnings yesterday, and it included some positive elements as well as some worrying ones. In table 1 I have punched in the reported numbers from yesterday together with the numbers from my previous article What is Facebook really worth.

I had originally expected Facebook (FB) to reach 950 million users by the end of 2012, adding 100m. Since the number of users reached 901m by the end of March, this number has to go higher. FB is grasping new territory at a good pace – this is an amazingly good sign. I have not yet decided if I will increase my of 1.150 billion prediction for the overall number of users in 2014, or just let the quicker pace now cannibalize on the later years. We have touched on the point in another previous article, How big can Facebook become.

On the more worrying side of matters in the report is that earnings per user have dropped! In Q1 2012 earnings were USD 1.2 per average user in the quarter, see table 1. On an annualised basis, that adds up to USD 4.8, versus USD 5.1 in 2011, or equal to a decline of 6 percent. This is not the best signal to send, as investors want to see earnings-per-user expand and not contract. This might just be a fluke, but ahead of an IPO investors have to take this into account.

I also have been expecting Facebook to have higher marketing expenses than has been seen historically, and this seems to have panned out. In Q1 the expenses reached USD 159 million, just shy of USD650 million on an annualised basis, much higher than the USD 427 million for all of 2011. The acquisition cost, i.e. what does it cost to get a new client, increased to USD 2.7 from the pace of USD 1.6 in 2011, see table 1. The cost is less than the USD 3.8 my initial calculations for the year 2012. The difference is based on the higher pace of new users as the higher level of marketing expense was more or less in line with my expectations.

Conclusion
Facebook continues to pick up new users at a quick pace and this will build its position even stronger in the social media space. More alarming is the decline in revenue per user and increase in marketing costs per user which all in all, leaves some questions about the level of market value the IPO can reach when we finally get to that point.