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Why Facebook may not be a wise investment

By Kenneth C. Wisnefski,

Facebook officially filed its IPO on Wednesday.  The initial public offering is expected sometime in May and will value Facebook at $75 billion to $100 billion. 

The company generated $3.7 billion in 2011 revenue.  As strong as this figure sounds at first, a savvy investor should look further in to its financials to see how Facebook generates so much revenue.  It is reported that the social media titan generated 85 percent of overall revenue from advertising. 

We see this every time we log on to Facebook, targeted advertising campaigns that are Facebook’s version of a pay per click campaign.  Overall revenue should be carefully investigated before investors make Facebook their long-term stock holding.  It seems rather risky to invest in a company generating 85 percent of revenue from a single stream.

 Sometime in May, when Facebook trades public (expected under the ticker FB), it is forecast to be the IPO of the decade.  Right now, there is tremendous optimism for their first day of trading; it would surprise no one if its stock soared into the multi-hundreds (as LinkedIn did).  However, as much as Facebook is expected to charge out of the gates, investors should be concerned about investing in Facebook long term.  Expect heavy emotional investing initially, to be taken over by fundamental investing (which may lead to a lower share price).

 Figures, courtesy of eMarketer, indicate Facebook’s ad sales grew 104 percent in 2011.  That figure, however, is only expected to climb 58 percent in 2012, and 21 percent in 2013.  The trend is diminishing which indicates its dependence on ad revenue could be a fading trend.  Furthermore, when we look more closely at the CPM (cost per thousand impressions), Facebook is earning a mere 22 cents while the industry average is around 50 cents and rival Google is earning $2 to $4.  Facebook can correct this and put itself in a stronger position by launching its own ad network. However, that will be a significant challenge to compete in that market largely dominated by Google and other search engines.

 Other facets of Facebook, including Facebook Credits, are expected to grow, however less than 8 percent over the short term.  In order to correct the slowing growth in its advertising revenue, Facebook needs to do a better job in showing advertisers and marketers that advertising on its platform yields results.  As of now, earning marketers less than half the industry average in CPM is not a convincing argument that advertising on Facebook works. 

Prior to its IPO, Facebook should invest its resources in to improving this number and convincing consumers that perhaps increasing brand awareness is generating return on investment (versus soaring CPM margins).  Investors looking to make a quick buck should still pursue taking part of the social media investing party expected in May.

 Kenneth C. Wisnefski is founder and chief executive of WebiMax, an online marketing firm in Mount Laurel, N.J., specializing in search engine optimization, search engine marketing, pay per click management and social media marketing. 

 

 

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