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Facebook (NASDAQ:FB) continues to strengthen their title of most soiled IPO in internet history. Despite having over 900 million users, I’d continue selling Facebook stock for these 3 core reasons:
Strategy Appears Desperate. Purchasing Instagram? Expanding to tweens? These two major decisions prove Facebook continues to focus primarily on user acquisition long after reaching the promised holy land of a country’s worth of users. I guarantee many financing rounds ago, Facebook pitched investors on better monetizing a much smaller user base. So, let’s get to it! You have enough users to make more money than has ever been made in the Universe. Now start directing all that intellectual capital on getting users to pay for the value Facebook provides. The company has done an incredible job acquiring users. Kudos! But if you discover a way to get 900 million people to congregate somewhere without exchanging significant capital for that value, you just have a lot of people using your shit for free.
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Valuation is Absurdly Risky. If you apply Apple’s (NASDAQ:AAPL) or Google’s (NASDAQ:GOOG) valuations to Facebook you get $6-7. If you use more aggressive fundamental modeling, you can rationalize a $19 stock price. But every dollar higher you pay for the stock drastically increases the probability for a low ROI. Buying at these levels is a high risk, low reward proposition.
Competition is Heating Up. Pinterest and Path are definitely displaying how the future of social networking is merely in the top of the first inning. The dawn of the hyper sticky niche social networks versus the Fruit of the Loom one-size-fits-all platform is upon us. Can Facebook continue to keep users active? More importantly, can they find ways to monetize users who are being drawn to other platforms for commerce? Will adapting to competition morph Facebook into something new people won’t use? Bottom line: it’s too early to tell, but the risk is extremely real and growing each day.
With that said, I am not a Facebook hater. I could easily see buying shares of Facebook if they are valued according to reality rather than hype and hope. Until then, gravity will continue shaping their share price into a mirror reflecting monetization.
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