facebook

Facebook Inc (NASDAQ:FB)’s revenues grew 71.6% year-on-year for the first quarter, driven almost entirely mobile ad growth, which is up 82% over 1Q13. On the surface this shows that Facebook Inc (NASDAQ:FB) is aptly managing the transition to a mobile user base, but the details reveal some potential weakness in the social media company’s plans for future growth.

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Facebook’s DAU growth has slowed

As Indigo analyst Nicholas Landell-Mills explains in a May 10 report, Facebook Inc (NASDAQ:FB)’s main advantage is its sheer size. MySpace disappeared surprisingly quickly, but it never came close to Facebook Inc (NASDAQ:FB)’s current level of daily active users (DAU), and at this point any social media startup either has to fill a different niche or give people an incredibly compelling reason to use a network that can’t already connect them to all their friends.

Coupled with Facebook Inc (NASDAQ:FB)’s focus on mobile and its willingness to buy up potential competitors (ala WhatsApp), Facebook has a completely dominant position in social media.

Growth has bottomed out in the US, Canada, and Europe, but that has more to do with saturation than the occasional claim that young people have stopped using Facebook Inc (NASDAQ:FB) (they haven’t), and growth in the rest of the world still gives Facebook plenty of new users each quarter.

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Revenue from desk top ads has also been roughly flat for the last few years, but the growth in mobile ad revenue has been explosive (driving average revenue per user) and is a big part of why there are still so many Facebook Inc (NASDAQ:FB) bulls despite the high valuation.

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Facebook’s Ad impressions begin to fall

The problem is that the number of ad impressions is actually falling, ad revenue is on the rise because advertising costs have risen even more quickly (measured in cost per thousand, CPM). That’s fine in the short-term, and the sudden rise could mean that Facebook Inc (NASDAQ:FB) has been undercharging what advertisers were willing to pay for the last few years, but there’s a natural limit to raising rates before companies start looking for other ways to get their name out.

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Landell-Mills sees a few opportunities for Facebook Inc (NASDAQ:FB) to increase ad revenue through innovation instead of price hikes (Instagram ads, video ads), but it has to be careful to introduce new types of ads without alienating users. As an advertising platform, Facebook’s revenues are really based on just a few metrics: the number of active users it has, the number of ads it can serve up, and the amount it can charge for each ad. The first is maturing and the second is falling, which place a lot of pressure on the third.