Facebook CEO Mark Zuckerberg said several encouraging things when he spoke at a tech conference yesterday.
One thing he didn't address, however, is the rate at which Facebook's desktop usage is declining in its most mature market--the U.S.
Zuckerberg also didn't comment on another ominous Facebook trend: The usage declines are most pronounced among those who were once Facebook's most devoted users: Young people.
Lots of young people have decided Facebook isn't cool anymore, and they're abandoning it in droves.
And because young people are often a leading indicator of what mass market consumers will eventually do (they fueled the early growth of Facebook, for example), Facebook investors should take note.
One sharp Wall Street analyst, Ken Sena of Evercore, highlighted this troubling Facebook trend in a note this morning. Here is his key point:
Accelerating U.S. traffic declines and younger demo exodus create fundamental concerns. U.S. comScore data show Aug time spent down 12% pro forma (down 14% reported) y/y. The declines are primarily attributed to age groups 12-17 and 18-24, which declined 42% and 25%, respectively. We note that although comScore did acknowledge a small change in reporting as of August, which affected Facebook, on a pro forma basis, U.S. core trends showed accelerated decline across all measures.
Sena then underscores that what's going on here is not just the transition to mobile:
Mobile migration provides only partial answer. Although FB is experiencing accelerated desktop declines vs. the broader web, we find growth in mobile engagement to be just in line, relative to peers, such as Google and Apple, suggesting share loss in time spent when consolidated for desktop and mobile. Nevertheless, we do still believe in Facebook's mobile opportunity. As example, we show how one small start-up, Twenty.me, is introducing in-text mobile search within group conversation, an area where we see Facebook as uniquely positioned.
Finally, Sena becomes the first Wall Street analyst to acknowledge that Facebook's valuation at its IPO was extraordinarily optimistic, and he slashes his price target to $23.
Reducing Outlook. Going forward, we no longer model U.S. core traffic growth, where Facebook earns the majority of its revenues. As such, we see growth stemming from continued international user growth, higher desktop ARPU, and mobile advertising. On these revised assumptions, we now forecast a 21% CAGR which implies Facebook revenues can increase from $4.9 billion in 2012 to $15.2 billion by 2018. As a percent of revenue, we expect mobile to reach more than half of total revenues by 2018, or 52%, up from 6% in 2012 (or ~$300 million) Lowering Target to $23 (from $34). New target weights a DCF in which no credit is assigned for future mobile payment revenues or for growth in U.S. core traffic engagement. Our target also reflects two additional downside scenarios, a) a 50% reduction in our mobile ad ests. and b) a sustained 5% decline in U.S. traffic.
Now, if kids are indeed abandoning Facebook in droves, is there a silver lining here?
Yes.
The silver lining is called "Instagram."
Anecdotally, one of the services kids are flocking to at Facebook's expense is the new mobile photo network Instagram. Instagram was founded only a few years ago, and it's usage has already exploded to 100 million registered users (one-tenth of Facebook's global users). Instagram has yet to be "monetized," but given its emphasis on visual images, it's not hard to imagine that it could eventually be an effective advertising medium.
And Facebook owns Instagram.
So young Facebook users who are abandoning Facebook for Instagram are still in the Facebook fold. So that should at least moderately ease concerns about declining Facebook usage among kids.
Zuckerberg explained the new direction of Facebook in an interview at Disrupt 2012:
SEE ALSO: ATTENTION FACEBOOK INVESTORS: Mark Zuckerberg Just Said Several Encouraging Things...
