Shorting Facebook Inc (FB) Stock Now Could Be a Disastrous Move

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Ad load slowdown could hurt Facebook ARPU growth and drag overall growth. But, should You Short FB stock?

 – What are the current problems the social media giant is facing?

 – How are they addressing the issues in the short term?

 – Does that mean the end of growth, or is there something else investors need to realize?.

Facebook Inc. (NASDAQ:FB)‘s stock price has been on a downward trend over the last 30 days. The sharp downward correction can be directly attributed to Facebook’s third quarter earnings where the management warned investors of slow growth.

Facebook Chief Financial Officer David Wehner said ad growth would likely slow “meaningfully” due to limits on “ad load,” or the number of ads that Facebook can put in front of customers without alienating them.” – Reuters

The Problem of Average Revenue Per User (ARPU)

One of the key factors behind Facebook’s phenomenal growth rate in the last few years is the way its ARPU has grown worldwide. ARPU can only grow if either the advertisers are ready to pay more than they did before, or if Facebook shows more advertisements to the same user than it previously did. (See alsoFB Stock: This Catalyst Will Drive Facebook Inc. Stock Higher In 2017 And Beyond)


Both these metrics do have a limit. The company cannot indefinitely keep adding more ads for their users to view, which is what ad load implies; nor are advertisers going to be extremely happy to keep paying more and more each year.

This is why ad load is indeed a critical factor in ARPU growth which, in turn, will influence Facebook’s overall revenue growth.

There is one way to address this issue: Facebook can still increase the average number of advertisements it is able to show its user if the user increases the amount of time he/she spends on the platform. Unfortunately, even that number cannot keep growing forever.

The User Growth Dilemma

To break that cycle, the only option left to Facebook is to keep increasing its user base, which is the last part of the growth equation. And that’s something the company continues to do quarter over quarter, year over year.

But that growth has come down from what we saw three years ago, which only explains the natural progress the company has made. As user base keeps growing, the potential market size keeps getting smaller, and the growth trajectory reflects that.

Ad revenue growth has been at the above 50% rate in the last few quarters and, clearly, that rate of growth cannot keep going on forever, which is implied from what Facebook was trying to convey to investors.


The question is: do all these factors align to make Facebook a badly managed company that’s already reached its peak potential? By any standards, absolutely not.

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