Tuesday, May 22, 2012

Facebook is a Bad Investment


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Nasdaq is receiving a lot of bad press regarding the Facebook IPO and problems with their trading platform. Some of this is justified because the IPO was interrupted and trades were not executed or cancelled successfully, but ultimately it is not the cause of Facebook's meltdown in the open market. The bottom line is that Facebook is a bad investment and it was never worth the initial valuation of $100 billion. At the time of this writing, FB has lost more than 20% of its value since the IPO started.

There are a lot of people in the world that like Facebook as a social media platform. It has an immense customer base including individuals, governments, and organizations. Many companies regularly use Facebook in their marketing and work to socially connect their companies with customers. Facebook also develops a lot of ad impressions and has taken steps to build a platform that developers can use to make money. Many pages have a "like"button or functionality to share something on Facebook. For all that it provides, Facebook fails the test of both long term and short term ability to serve shareholders (both from a growth and income standpoint).

Facebook launched its IPO in both a declining profit and declining revenue scenario. Facebook, as a product, is in its decline stage (and it reached a peak a couple of years ago). Although people will continue to use it, it will become easier for competitors to chip away at Facebook's regular user base. Coupled with Facebook's horrific ad performance and their lack of partnership with other organizations with regard to its demographic data, this spells a long term underperforming stock and an almost permanent sell (or short sell) rating.

When you look at Facebook compared to other technology giants (like Apple, Google, and Microsoft), ask "What is Facebook actually selling?" Right now, they are selling underperforming ad space and a couple of digital products with limited marketability. They have no real long term product offerings and their sources of revenue are difficult to imagine without Facebook compromising customer privacy.

Ultimately, individuals and organizations need to communicate with their financial professionals to determine the suitability of any investment for their portfolio. My opinion of Facebook is that they are a strong sell (and a never buy), but we'll see if the market proves me wrong.

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  4. It's true, when comparing facebook against its competitors such as Google they do not have a product to sell or compete aside from ad space at the moment. Facebook like the former social network powerhouse Myspace, active users may be slowly converted towards another competing server. It would be a bad idea to invest in FB without knowing the company mission after the release of their overly high value IPO was released; after all like Mark said, “Facebook isn’t intended to be a public company.”

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