- Concerns around user growth and saturation metrics may be overdone.
- Growth outside North America will continue to be strong.
- Continued growth in ad revenue via new and more potent channels will provide a buffer to FB.
Among the primary concerns surrounding Facebook (NASDAQ:FB) shares at this time is user growth saturation. They say with 1.7 billion monthly active users and 1.1 billion daily active users, the core Facebook user base is approaching full penetration of the global internet population. But is it?
Facebook’s user growth has been impressive and has in fact even accelerated, both on a percentage and absolute basis in each of the last two quarters. The recent drivers of growth have been friend recommendations, increased integration with new platforms like Messenger and Instagram, and the roll-out of Facebook Lite and other initiatives in emerging markets.
After seeing slower growth in the U.S. and Canada in 2014, Facebook experienced reaccelerating growth on both a percentage and absolute basis, growing by 5% or 10 million monthly active users in 2015, which was a step up from the respective figures of 3% and 7 million in 2014. While the U.S. may be Facebook’s first and most penetrated market, the social network continues to prove that its growth in the U.S. and Canada is far from over. In fact, Facebook continues to show reaccelerating growth rates through the first half of 2016. Given this re-acceleration, Facebook is expected to end the year with a 71% penetration rate in the U.S. and Canada, with that statistics growing to 73% by 2017. Beyond 2017, Facebook is expected to continue growing moderately, lifting the penetration rate to the mid-70% range over the 2018-2020 period.
Facebook’s penetration of European internet users is expected to grow from 52% in 2015 to 56% in 2016 as user growth rates have recently been reaccelerating. Surprisingly, Europe is the lowest penetrated market for Facebook, which reaffirms the potential future opportunity ahead for improved penetration. Facebook is likely to see penetration rates above 60% by 2019 versus the mid 50% range currently. Admittedly, we do note that a large portion of the incremental user growth in Europe will likely come from less monetizable users in Eastern and Southern Europe.
Growth remains robust in APAC with monthly active users growing 21% in 2015 to 507 million. The growth in absolute net adds is primarily attributable to robust growth in APAC internet users. In particular, APAC’s growth includes the attractive end market, India, which has experienced internet user growth of 52% in 2015 and 30%+ so far in 2016. As a result of tailwinds like India in addition to generally increasing penetration, APAC user growth is set remain healthy for some time. Expectations call for perhaps as high as mid-70% penetration rate by 2019 versus the mid 60% range currently.
Over the next few years, the Rest of World region will be the most interesting to watch given that growth in the region’s internet users will be partly driven by initiatives from Facebook (Internet.org) and Alphabet (Project Loon). With Rest of World internet penetration being the lowest out of all regions, Facebook's opportunity is huge in this regional segment. CEO Mark Zuckerberg’s aspiration to ‘connect the world’ presents a long runway for advertising revenue as these users gradually improve their standard of living and shift consumer behavior online.
Facebook has not reached saturation. There remains upside ahead from growth in internet users and increased penetration. The finding represents upside to one of the four high-level drivers of ad revenue for core Facebook. Accordingly, there remains compelling value in the Facebook stock, which only trades at 25x the 2017 consensus EPS outlook, representing a material discount to peer valuations for the FANG category.