Facebook: Doomed Like MySpace?
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Most common web-users may not notice any problems with social networking giant Facebook (NASDAQ: FB), but investors and stockholders feel exactly the opposite. After a series of drops on Wall Street, investors are more cautious than ever about investing in Facebook.
The world's biggest social networking site reached a record intra-day low after Sanford C. Bernstein gave it an underperform rating. It has continued in a downward trend since the IPO on May 18. It seems ironic that a site with so many users could not find "friends" that would buy from it. We will have to wait to see if Facebook can break this horrible downward trend sometime soon, but things are still not looking good for the company.
Facebook is not the only one that had a bad week on the stock market though. As a whole, social-media stocks became sluggish, as did some tech stocks. For example, both Zynga (NASDAQ: ZNGA) and Groupon (GRPN) also struggled. This has led to some speculation that it is not profitable to invest in technology and social-media companies at the moment.
Despite this speculation, some experts believe that Facebook's struggle with revenue might actually turn out to be a good thing for Zynga. A huge chunk of Facebook's profit comes from social gaming, so it would be wise for investors to buy shares from Zynga now, while it is still connected to Facebook. There are rumors that the gaming company might be leaving in the future. Many believe this will not be happening soon, especially since both companies benefit from the current arrangement. If it does end up happening, however, it will be another huge blow to Facebook, which is still dealing with a large variety of issues.
Among these issues is a lawsuit that investors have filed against Mark Zuckerberg, as he allegedly failed to disclose crucial information before the IPO downturn. According to reports, Zuckerberg received information that Facebook is overvalued. Its revenues, which heavily rely on ads, do not justify its valuation. This information was allegedly shared with only select investors before the IPO, which has led to this lawsuit. The company already has a lot to handle, and this will hurt Facebook even more.
In addition to Facebook's advertising woes, it is now being overshadowed by Pinterest, a new social network that is drawing in a lot of online shoppers. Pinterest is more visually appealing and has bested Facebook by having a higher number of users who follow retailers. If Facebook cannot do better in social commerce, new sites like Pinterest may begin to take business away from it. Advertisers would likely shift to other social sites that have the ability to turn users into consumers. Since Facebook heavily relies on advertisements, fewer advertisers make for a major problem. With less revenue, investors would be even less likely to buy shares in the company, leading to a further drop in the market.
If Facebook continues this weak performance, it seems very possible that Google's (NASDAQ: GOOG) networking site Google Plus will outshine it. In its efforts to boost its social networking initiative, Google announced plans to buy Meebo. Though Google's shares declined 59 cents in the hours after revealing the Meebo deal, this should help Google's business. As a result, this deal may help the stock climb after its potential is realized.
While it deals with other issues, Facebook is nearing a settlement with Yahoo! (NASDAQ: YHOO). Yahoo! had sued Facebook for allegedly basing its entire social network model on its patents. While Facebook dropped to its all-time low, Yahoo! stock rose at the time of the settlement news. I cannot say with certainty that the news about the impending settlement caused the jumps in Yahoo! stock, but it is quite likely. Once Facebook pays Yahoo! to end the dispute, it will likely benefit Yahoo!, and this can reflect well on its future strength.
Facebook is currently trying to increase revenue, and to do so, it is attempting to allow people under the age of thirteen to access the site. We all know that despite the age restriction, a lot of children have Facebook accounts, and some even have their parents' permission. I am sure that Facebook is aware of this as well, but it is now trying to let them use the social network without having to hide their true age. Furthermore, it will protect them from harmful web content. Right now, websites are not allowed to get personal information from such young users. This is why Facebook is testing measures to make it possible for kids to join the network. Opening the site to this market is probably one of Facebook's ways of presenting new opportunities to advertisers. However, I agree with some experts that the thing that Facebook really needs to do is overhaul its business model.
Facebook has millions of users, but it cannot connect them to revenue. Not every user clicks ads or plays each game that the site offers. The most obvious way to generate revenue is for Facebook to charge its users by offering premium services. This will not be welcomed by the majority though, especially since Facebook promised that the site will always be free.
If it continues pinning its hopes on advertising, we can expect to see Facebook follow in the footsteps of MySpace, which has been crammed with a lot of annoying advertisements. This is probably the biggest hurdle for Facebook as of right now, and the key to solving it is devising a new model, wherein it can turn the value of its millions of users into profits. It also has to prove that it can sustain growth before another company creates the next big thing that will surely win the hearts of investors. Facebook's stock may continue to drop if it does not justify that its valuation is appropriate for the sales it generates. Only after this happens can it can gain back the trust of investors and break this downward trend.
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