Facebook's Unprofitable Obsession

Ahh Facebook, the much anticipated IPO of 2012,  the social networking product of Mark Zuckerberg that we all know and love.  When Facebook filed their S1 recently, the financial news world went into hysteria over what was to come.  What should have more relevance to investors is what is not to come.

Last weekend, I came across an article about Shutting Down Facebook Stores. First off, I did not even know that these stores existed; which makes me wonder did the rest of the Facebook world know about this one of a kind retail opportunity?  If you didn't catch the sarcasm, my point is this: Facebook failed to offer a different retail experience then was already on the web.  If someone wanted to go to Gamestop and buy a product, they would do just that, go to the Gamestop website or in the store.  Facebook attempted to monetize their website and their system of Likes (a fundamental element of the Facebook experience that allows a user to expressly like a post of another user or a product), and failed to do so completely.  This failure should strike fear into the hearts of social media investors.  Once again, Facebook, the giant of social media has shown that people may like their product, but monetizing it successfully is a different ball game.

We do know that Facebook has made money and a decent sum of money through their ad sources.  I will break Facebook's numbers down in a second; but first off, let's look at the problem intuitively.  Facebook claims to give advertisers a different and new advertisement experience.  It allows businesses to connect right to customers that find their products interesting.  What all those touting Facebook have failed to realize about the social giant is just that; Facebook serves a social service.  Facebook allows users to share photos, comments, likes, and so on.  Investors fail to realize that consumers are so caught up in the social interactions they do not have time for advertisers.  When someone is on Facebook they are either chatting or surfing the web of social information.  {Yes they may come across an advertisement or two, but they are more interested in seeing what Sally is saying to Bobby and what George is Facebook chatting them about.}

The most interesting part of the Facebook story is the pricing of the company.  Facebook made about $4 billion in revenue last year.  The company is set to be valued at $100 billion.  Those reading this blog likely know Apple well.  Apple made about $108 billion last year and their market capitalization was around $500 billion on Friday.  For the rough mathematics let's say the market cap of Apple is 5 times its revenue last year.  Applying these same metrics to Facebook we get Facebook, we get Facebook valued at $20 billion.  Well, you may argue Facebook is a growth company. Okay, then let's double the metrics, you get $40 billion.  Doubling isn't sufficient for you? Let's triple to represent the growth potential of Facebook and their one product, and we get $60 billion.  Even with a $60 billion market cap, the growth is handily priced in, and with $100 billion is just ridiculous.

Many compare Facebook to Google or Apple.  When making this comparison, those individuals fail to realize the almost perfect game that Google and Apple have played.  As stated earlier, Facebook has failed to monetize itself as a retail and is already off to a bad start.  What should raise more concern is the Facebook supporters suggesting Facebook will becomes its own platform.  Has anyone witnessed the trouble the android platform has had catching on?  If a company like Google, with their multiple successful products, has trouble becoming a platform and breaking into the computer and cellular space, think about the potential problems a company like Facebook, who has one successful product, will have.  To compare Facebook to giants like Google and Apple, at this point in time borders on ridiculous,  Google and Apple have proven themselves time and time again.  Facebook has proven itself kinda once.

Dont get me wrong. There may be money to be made on a trade in Facebook.  Above are merely the reasons why long term investing isn't just questionable, but truly ignorant.  As I mentioned last week in my article And They Say Tech Isn't A Bubble, tech is going to come crashing down, and Facebook looks like it may be the catalyst.

"Success is a lousy teacher. It seduces smart people into thinking they can't lose." - Bill Gates

Photo by Sean MacEntee