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Facebook Inc (FB), Apple Inc. (AAPL): This Is Beginning to Get Boring

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I’m sorry Facebook Inc (NASDAQ:FB) investors, but your company’s earnings reports are beginning to get very predictable. In fact, I sort of feel like I’m reading an earnings report from 1999. Right before the bubble burst, investors got very excited about companies that showed either non-existent or very slow earnings growth. Facebook is reporting growth in nearly everything except the number that counts most.

Facebook Inc (NASDAQ:FB)

Facebook Is Not Alone Know that some people are very excited about the idea of Facebook Inc (NASDAQ:FB) being able to monetize its user base. In theory, the company is getting to know its users better every day. If Facebook can leverage this knowledge into better advertising conversion rates, then the company could increase its earnings significantly.

However, Facebook isn’t alone in trying to engage users. Google Inc (NASDAQ:GOOG) has been trying to improve user engagement for years. Google makes good money selling advertising space, but it’s still relatively easy to replace Gmail with with Microsoft Corporation (NASDAQ:MSFT) Outlook or Yahoo! Inc. (NASDAQ:YHOO) Mail. Moving documents from Google Docs to SkyDrive or Dropbox is just a click away as well.

Facebook Inc (NASDAQ:FB) also faces a constant threat that popular ecosystems could get tired of integrating the company’s offerings. For instance, Apple Inc. (NASDAQ:AAPL)‘s iOS integrates Twitter and Facebook equally. However, can you imagine how that might change if Apple were to acquire Twitter (which has been rumored several times)?

In addition, there are upstart sites that are stealing users time away from Facebook. Web sites like Pinterest offer millions of users utilitarian ideas. Users are very likely to broadcast that they got the idea from the site, which drives better engagement. Yahoo! Inc. (NASDAQ:YHOO) recently made a bold move to acquire tumblr, and that site is seen as sort of the anti-Facebook.

The bottom line is, users of Facebook Inc (NASDAQ:FB) are there for one thing, to connect and share what is going on. The problem is, many users are getting bored. The reason websites like tumblrand Pinterest and even Facebook’s own Instagram are gaining in popularity is that they are more flexible. In fact, many users like these sites precisely because they are not Facebook.

You Are Already Big Enough, What’s the Problem? Facebook’s management doesn’t seem to get that having about a billion users means they have already reached scale. The company’s user growth is slowing, as daily active users were up 26% in the last quarter and monthly active users were up 23%. These numbers sound good, until you realize that not long ago these growth rates topped 30% or 40%. In addition, the company was quick to trumpet that mobile active users were up 54% to 751 million. Does no one realize that these are likely duplicate users?

If you look at Facebook Inc (NASDAQ:FB)’s peer group, they are all leaders in their respective areas. Google Inc (NASDAQ:GOOG) is the leader in search, Microsoft runs the vast majority of PC operating systems and has the most popular productivity suite in Office. Apple Inc. (NASDAQ:AAPL) may not always have the top market share in smartphones and tablets, but the company sells millions of these devices every quarter.

One thing that a market leader should have is high margins. However, if you look at Facebook, not only is their margin declining, but they are about to fall behind all of their peers. In the recent quarter, Microsoft Corporation (NASDAQ:MSFT) led the way with a 37.15% operating margin, Apple Inc. (NASDAQ:AAPL) came in at 28.80%, and Google reported a margin of 24.89%. Facebook’s operating margin dropped to 25.58% compared to 36% last year.

You would also expect a market leader to have excellent free cash flow, but Facebook isn’t doing well by this measure either. Microsoft again led the way with $0.30 of free cash flow per dollar of sales. Google and Apple Inc. (NASDAQ:AAPL) produced almost the same free cash flow per dollar of sales, with $0.22 and $0.21, respectively. By comparison, Facebook reported just $0.09 of free cash flow per dollar of sales.

Huge Growth Everywhere…Except the Bottom Line Though Facebook Inc (NASDAQ:FB) reported revenue up 37.81%, non-GAAP net income increased just 8.71%. The company’s gross margin declined by more than 2%, and marketing and sales costs jumped by 42%. Facebook’s increase in share count caused its non-GAPP EPS to come in flat on a year-over-year basis.

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