Facebook is Not Worth the Risk

Ash is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Facebook (NASDAQ: FB) has been in the news for two pretty big stories over the past few days. The first said that Instagram photos would essentially become the property of Facebook and the second outlined that Facebook may be considering auto-play video advertisements on the homepage of the site. As much as I’d love to join the bulls on this company and continue to buy a well overvalued stock, I think I’m going to pass.

Look at that P/E!

I was always taught that investing meant buying companies low and selling them high. Facebook’s P/E is through the roof somewhere up there in the high 200s. How can the company reasonably make enough money from their users in order to justify such a valuation? They can’t!

Netflix (NASDAQ: NFLX) was trading at similar levels and future growth valuations in 2011, then that company came crashing down from the top of their game. They are still trading at an over-the-top value, but nowhere near as much as their high flying days.

So what makes anyone think that Facebook can be any different? I think that the company is coming toward the peak of its user base and may even begin dropping if they implement auto-playing video ads, the selling of user content and other wacky schemes.

Competitors

The only real competitors to Facebook are Google (NASDAQ: GOOG) with their Google+ service and Twitter, a privately traded company. Twitter is planning on integrating features to compete with Instagram, and Google is sitting back quietly just waiting for their chance to crush Facebook in the social game. 

The thing with Google as a competitor is that they don’t have to focus on winning. They can play the waiting game, they can sit back, wait for Facebook to stumble and reap the rewards. Google+, although I don’t use it as much, definitely has a better layout and with the right turn of the wind they could take over the social market.

Old Timers

Need I remind everyone of MySpace, Bebo, Friendster or any of the other social networks that once had their moment in the light? All of them lost their stronghold on the market and users moved to another service.

It isn’t much for someone to stop navigating to Facebook.com and rather move to Twitter.com or Google.com/+. Users can do this over a day. Most wouldn’t mind having to start again, it’s not like they have to sign any papers, cancel any fees or move anything over. All that is needed is a name and an email, then they’re good to go.

My 2013 Facebook Prediction

I think the stock price of Facebook throughout 2013 will be pumped up to extortionate levels before staggering a little. After that stagger, who knows? It could rise again like Netflix or stay at an appropriate valuation.

In terms of users, I think Facebook will hit 1.1 billion, at the very best, by 2013 year end. If the new ad feature does come in and videos automatically play on the site, I know that I will no longer visit and will urge my friends to move to a new service. That’s all it will take in this game, one slip and the user base will move elsewhere.

The Risk

Stocks with high P/Es obviously have them for a reason. Sometimes, like in the case of Apple and Google, they pay off and those that bought early are able to reap the benefits. Most of the time, the stocks fail. If you buy Facebook, you’re taking that risk. I don’t believe the company’s product offering is secure enough to take such a risk. 


Ash1402 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Facebook, Google, and Netflix and has the following options: long JAN 2014 $20.00 calls on Facebook and long DEC 2012 $16.00 puts on Green Mountain Coffee Roasters. Motley Fool newsletter services recommend Apple, Facebook, Green Mountain Coffee Roasters, Google, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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