Don’t “Like” Facebook

While Facebook’s tally of users may jump from 50% to 90% in short order, there’s no guarantee that the company’s profits, or share price, will get the same boost.

I wrote on Facebook’s stock last December, saying I’d prefer to stay on the sidelines as its business model remains unproven. At the time, Facebook (Nasdaq: FB) was trading at $26.

Today, it’s still trading at $26… seemingly left behind in the 2013 stock rally that’s gained more than 17% since the start of the year.

There’s nothing to “Like” about that.

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There are two problems here. First, before social media startups became the latest craze, company’s figured out how to make money before they went public… not after. That’s no longer the case.

Second, Facebook, Twitter and Instagram are just a few of the social media entities more concerned with growing their customer base than actually making money from the business. And I use the term “customer base” loosely. Can you call a user a customer if they pay nothing to use your service?

The popularity of these sites, and the number of free-users they attracted, shot past the 10% threshold of Harry’s S-curve very quickly. Revenue, on the other hand, has not.

These startups knew they’d eventually have to convince investors that some business model would be profitable. They just seem to view that as an afterthought.

Most assumed typical advertising models would work just fine. But Facebook ran into problems when General Motors publically shamed the company by declaring that its Facebook ads didn’t work.

Facebook also discovered that smartphones can sometimes be more of a curse than a blessing. While Facebook users increasingly used mobile devices to update their status, they completely ignored the ads displayed on the small screens.

Facebook investors have been equally disappointed. Those who participated in the IPO buying frenzy suffered a loss of at least 50% by September of last year. Ouch!

Shares have recovered somewhat since dropping close to $17 per share. They’re now above $25. However, that’s still far from the IPO price of $38.

I’m sticking with what I said last year… I prefer to watch this one from the sidelines. I recommend you do the same.

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Categories: Markets

About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.