Is Facebook stock a bad investment?

The social networking behemoth is preparing to launch the largest Internet IPO in history, but some investors are starting to doubt the hype.

By Apr 26, 2012 9:34AM
Facebook's feverishly anticipated IPO is expected to raise $10 billion and value the company at an astounding $100 billion. But Facebook's financial results for the most recent quarter show that the company's net income fell by 12% from the previous year, and that its total revenue dropped from the previous quarter.

With Facebook's momentum seemingly slowing, some investors are poking holes in the assumption that Facebook stock is a sure bet. Also worrisome: Facebook is considering delaying its IPO to June, reportedly so that it can better focus on a recent round of expensive acquisitions.

Is owning a piece of Facebook not as lucrative as it once seemed?

Beware these red flags

Facebook, with a "mind-boggling 900 million users," is absolutely huge, says Matthew Ingram at GigaOm. But the fall in net income is troubling; a company as large as Facebook should have "money flowing to the bottom line, and lots of it."

Facebook has doubled its marketing and sales costs to extract more money from users, but it currently makes "a remarkably tiny amount from each one: About $5 a year." If it can't squeeze more out of its "existing user base," Facebook could begin to resemble a "red giant" star that "starts to consume its own resources and eventually implodes." Buyer, beware. 

Don't worry. Facebook will figure it out

With its sprawling user base, Facebook will surely be able to develop an online advertising model "that makes a boatload of money," says Nicholas Carlson at Business Insider. The company "just hasn't figured out how to make that happen, yet."

Google (GOOG) is attractive to advertisers because "consumers go on to Google and search for products," and Google "shows them ads from the company that makes that product." Facebook is different in that users share information about products to other users and entice their interest -- in essence, Facebook "creates" demand rather than just "satisfying" it. And that's a valuable, as-yet-untapped asset.

Focusing on Facebook's numbers misses the big picture

"Few investors are buying Facebook for first-quarter results," Lou Kerner, founder of the Social Internet Fund, tells the Los Angeles Times. "Facebook is trying to dominate a massive new sector — social media — and is willing to forgo short-term revenue growth and profitability." If Facebook succeeds in becoming the biggest player in that industry, it will be hard for a competitor to knock it off its pedestal.

More from The Week:
Apr 26, 2012 12:25PM
Facebook is a Fad and people will jump ship as soon as the latest-Greatest comes along! ( Think MY Space) Already rumors of a new social site called "Privy" (I think) that will offer 100 times the privacy control of FB. Don't waste your money on this one unless you are a professional - Insider!
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