Why Facebook Is Not a Good Investment
Yasir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Social Networking sector has gone from being just several sites like MySpace and Friendster to an industry worth billions of dollars. Facebook (NASDAQ: FB) is the largest social networking website in the world with over a billion active users. After its Initial Public Offering in 2012, some investors believed the stock to be a cultural touchstone worth $50+, while other analysts thought of Facebook as an overvalued stock, which led to a significant decline in share prices. Since its formation in 2004, Facebook still looks like an impressive social networking site and is well ahead of Google's (NASDAQ: GOOG) Google+ and LinkedIn (NYSE: LNKD) in terms of popularity; however, in terms of investment - maybe not so much.
Valuation
With market cap of over $66 billion, Facebook is currently trading between $26 to $29.
You can see, in the graph (Source: Yahoo Finance), that Facebook has never been able to reach that $35 to $40 mark, which many enthusiasts believed it would touch. After trading for nearly 11 months, I think that Facebook is priced fairly well and might be a little overvalued. I don't even believe it to be a company worth $30 per share, not even in the long-term.
Facebook's last quarter of 2012 showed a profit decline of nearly 80% to $64 million year-on-year. Revenues, on the other hand, rose 40% to $1.59 billion. Even though Facebook didn't perform well in terms of profitability, its ad revenue gave investors something to be optimistic about. The company's total ad revenue went up nearly 40% with the mobile ad revenue contributing 23% to the total ad revenue, a significant improvement from 14% in the previous quarter. Getting into the mobile segment was seen as a challenge for the company, but a growth in mobile ad revenue shows impressive growth.
LinkedIn is one of the fastest growing social networking sites in the world and is currently trading between $170 to $179. Compared to Facebook, the stock might look overvalued, but the company's professional and corporate model, along with high growth makes it a reasonably fair valuation. Also, many analysts still believe that the company is a buy, especially because of its future growth expectations. Google, on the other hand, has already hit the $800 mark, however, Google+ might have very little to do with it. The relatively new social networking site is still trying to find its way to Facebook as it still hasn't received much popularity.
Why Facebook won't improve in the future
Facebook was the next big thing - not any more. The company has already seen its best years and I have little doubt that Facebook won't turn into "just another" social networking website. No matter how many graphs the company brings in or how many times they change the user interface, I just don't see it happening for Facebook.
Competition is one of the biggest reasons why Facebook does not have many good years ahead. However, the competition is not in terms of another social media website offering similar features like Google+. Competition in terms of various different companies providing specialized features that Facebook, as a whole offers.
There is no doubt that LinkedIn has seen tremendous growth in recent months and I don't see a reason why this will stop any time soon. The website offers a very professional way of interacting with others and displaying one's information. It is also a brilliant website for, both, job seekers and employers. From search for fresh jobs to connecting with company colleagues, LinkedIn has it all.
Instagram and other mobile apps are taking over the photos segment. Taking images, editing them and uploading has never been easier, which is why Instagram is such a trend nowadays. Aside from that, Twitter is still the best website to update statuses and spread rumors. Who still updates their status from Facebook? Apps like Whatsapp, on the other hand, are taking over the chatting segment.
After the Facebook Graphs, the company continues to invest in new features like the Facebook gift cards and the upcoming news feed. A lot of people are eagerly waiting for the news feed update, which will convert the news feed into a personal newspaper. If LinkedIn continues to growth, along with Twitter, I seriously doubt if people would want to use Facebook as just a personal newspaper in the future.
Facebook has been innovative in previous years, bringing something new in social media. However, the company doesn't have many more innovative ideas in its bag. The company has been on top and was one of the biggest technological advances of its time. All that is over now. Yes, the company is still seen on par with Apple and Google, but the future just doesn't look as good. A social media site, which has already passed the innovative stage, worth $30 a share just doesn't look right. Also, Facebook will need to show massive profit jumps soon in order to stabilize its ridiculously large P/E ratio. Even though LinkedIn's massive P/E ratio of nearly $1000 cannot be justified, the company has a great growth potential and has lot to offer in the future.
Why some people believe that Facebook still has bright future
Although Facebook's numbers aren't looking that good and it might have very little left for the future, the website's performance has been excellent.
(Source: Statista.com)
An improvement into the mobile segment is also seen another reason why Facebook has good years ahead. However, the company's profitability has not been impressive, even though the last quarter's profit decline was because of the expenditure on new features. If Facebook fails to generate enough profit in the future, even a billion users can't save its future.
Conclusion
Facebook was and will always be a revolutionary company in the tech sector. It has seen some great times and is the most popular social networking website. However, social media media might not stick around for a long time - at least Facebook's style of social media. LinkedIn and Twitter might finally be able get above Facebook after all, while Google+ still finds itself working hard to go on top. Technology keeps on changing and the Facebook social media fad (or whatever you call it) doesn't look like it's going to stay much longer. It might have a few good quarters ahead, however, it just doesn't look like a good long-term investment opportunity.
Yasir Idrees has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google, and LinkedIn. The Motley Fool owns shares of Facebook, Google, and LinkedIn. 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!
