Facebull

I am a fan of Facebook. I truly am. But will I put my money in it? I don’t think so. Like I mentioned in my earlier post, I still think tech stocks are naturally bubble prone. We have seen it in the past with Groupon, Zynga, Pandora et al. And soon it will be Facebook’s turn. The on-going IPO, which values the firm around $ 104Bn, is simply atrocious.  While it may not be right to compare Facebook with the likes of Groupon and Zynga, there are many reasons to do so.

While Facebook’s revenues may have increased in Q1 2012 compared to the previous quarter, its ARPU (average revenue per user) dropped 12% to $ 1.21. Facebook cited ‘seasonal trends’ as the reason for this decline. Seasonal trends! Really now?  The truth is, while Facebook’s user base continues to grow, it is not able to generate enough revenues. Online display advertising, Facebook’s chief source of earning, does not hold a strong promise. Let’s pause here and ask ourselves how many times have we ever clicked on a display ad on Facebook? 900m plus users is impressive. But it also poses a challenge for growth. Forget doubling profits, I really doubt if Facebook can even sustain a modest q-o-q growth.

For Facebook to sustain profitably, it clearly has to think of innovative ways of making money. Its biggest challenge would be to retain existing advertisers. As I write this, GM has announced that it will stop advertising on Facebook as it has little impact on the users.

The on-going IPO has generated much heat which, I believe, is nothing but herd mentality. Most of the investors are in for short-term gains. And they should! Knowing that Mr. Zuckerberg would continue to control more than 50% of the voting rights, why would any shareholder like to stick around for long?  Imagine a hypothetical scenario wherein Facebook files for Chapter 11. What can you, as a shareholder, possibly get in liquidation? What are the tangible assets of the Company? Hmm.

I read somewhere that Facebook is not a Company. It’s a social experiment. How true!