Facebook’s (NASDAQ:FB) cash flows have benefited from a combination of sustained pricing growth, user volume growth and high operating leverage. While we expect user growth to be largely unaffected, the company’s focus on platform health could potentially reduce advertiser ROI, leading to pressure on pricing. Furthermore, the company’s investments in fixed costs to rein in the spread of fake news and general misuse of the platform could also pressure the company’s operating leverage.
Our interactive dashboard on Drivers of Facebook’s Free Cash Flow outlines our estimates. You can modify any of the key drivers to visualize the impact of changes, and see all Trefis technology company data here.
User Growth & Pricing
Facebook’s growth has been fueled by impressive user engagement and a strong network effect. Consequently, the company has been able to build up a massive base of over 2 billion active users.
The sustained user base growth, coupled with the company’s data mining capabilities, allowed Facebook to help serve ads to relevant users. Not only did this help to drive up ROI for marketers, it also translated into pricing strength for Facebook.
The low marginal cost associated with adding incremental users has allowed Facebook to enjoy high operating leverage, which has translated into high profitability for the company. We previously discussed about how the operating leverage in Facebook’s business has evolved.
In light of the public outrage around the misuse of user information to influence popular opinion, Facebook has started investing in platform surveillance and arresting the spread of fake news. While platform surveillance measures could potentially reduce ROIs for marketers (by limiting the access to user information that marketers would have versus what was available previously), increased investments in platform health could lead to an increase in operating expenses. Overall, while Facebook’s user growth and low cost of acquisition is likely to keep the company’s cash flows healthy, austerity measures on the platform side could dampen cash flows.
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