This is the final warning to my friends and all investors lining up to buy a piece of Facebook [FB:NSD] - don't. Here's where I get blunt, which I rarely ever do here. Buying Facebook is the worst thing you can do. Not only will it prove your lack of reasoning and investment judgment, you will lose thousands of dollars too. It does not make enough money to justify its valuation and it most certainly will not make enough in the coming quarters either. And you would be naive to assume current shareholders are not waiting to sell their shares come May 18 when it hits the frenzy of the stock market. I want to save you from losing your hard-earned money by making you understand that Facebook as an investment is a poor decision. The hype surrounding Facebook is resounding and its prospect as a multi-billion dollar business is valid, but I believe this is another case of overvaluation. If you frequent my blog, you know that valuations are a key topic of mine, so you will know exactly where I'm going with this. You would be crazy to think FB would be a good investment at these prices and here's a few rreasons why.
My personal opinion is just that, an opinion, but fundamentals never lie. Based on current IPO valuations, Zuckerberg's company is worth a staggering $100 billion. This makes Facebook worth as much as McDonald's [MCD:NYSE], twice as much as Starbucks [SBUX:NSD], and four times as much as Dell [DELL:NSD]. McDonald's generated $27 billion in sales in 2011, trumping Facebook's $3.7 billion. And Dell, well it sold $62 billion worth of computers last year alone, and some how the company is worth just a fraction of Facebook.
Of course, Facebook isn't just some company. It's the world's largest social media site with 901 million active users. That's 12.8 per cent of the world's population and some expect this number to reach 3 billion. Strong growing numbers in users and revenue generation makes it a bull case for many, but they are sadly mistaken. With valuations over $100 billion, people have already priced in perfection. No company is perfect.
The first concern would be their inability to make real money. Last night, General Motors [GM:NYSE] cut ties with Facebook citing that advertising on FB was unsuccessful. Don't be surprised if more big businesses make the same decision. Recent polls suggest only 23 per cent of users click on advertising on Facebook. In fact, on advertising, Facebook earns just $3.75 per user. One could argue there's a lot of room to grow here too, but who really clicks on ads? Maybe future share holders trying to prop up the price. The company does not monetize from mobile and tablet users either and this must change as more and more of its users make the transition away from computers.
Secondly, the company's growth is decelerating. At December-end, its profit fell 12 per cent and revenue grew at 45 per cent, down from 55 per cent. Falling revenue and rising costs (strangely it doubled its marketing costs, but I've never seen an ad ever for the site) points to a falling stock in the future. This is evidence that margins are peaking or have peaked in the last 12 months. And its decreasing user count in North America is not a good sign either. Its global user growth rate has stalled to a trickling 1.5 per cent. There are only so many people in the world, and the laws of big businesses are starting to set in.
Thirdly, the CEO shows very little Wall Street prowess. Yes, he built a $100 billion company, but pleasing millions of shareholders is an entirely new realm of business Zuckerberg has yet to endure. His recent actions indicate he still acts like the boss and not the CEO of a publicly traded company, but that may change with time. Why does that matter? Because when you're a public company, shareholders with 100 shares or 100,000 shares care mainly about the stock price.
Some will argue that Facebook is the next Google [GOOG:NSD] and Amazon [AMZN:NSD] and truthfully, I agree in many senses. The company has already grown and become a big part of our lives and culture that it can not escape any aspect of our society. Businesses love it, people love it, politicians, well they're learning to love it. But therein lies its own demise. Its size is immense, and as such, it has little room to grow. Its expectations as a company are so ridiculously high that any hiccup could send these shares tumbling. Some believe that Facebook or Apple will be the first company to be worth $1 trillion. To those investors buying on Friday that believe that the shares will grow much like Google's and Amazon's, it appears your wishful thinking is misplaced and your numbers miscalculated.
When Google went public in 2004, it was valued at $30 billion. And Amazon was worth just $500 million. Today, they are worth about $200 billion and $100 billion respectively in market capitalization. Facebook might be the next Amazon in more ways than one, but I must stress that going public and already being worth $100 billion is not the same as going public at $500 million and growing to $100 billion. Facebook is at its pinnacle, its peak, its zenith if you will. Unless the company makes radical changes to its business model, the prospect that these shares will make you millions is slim. You are better off betting $10,000 on black. At least you won't have to pay a commission at the casino.
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