Seeking Alpha
Profile| Send Message| ()  

As I've already noted in my articles on the popping of Bubble 2.0 and the flow of capital from technology to the natural resource sector, I think Facebook has a lot of room to fall. Specifically, I wouldn't consider buying the stock unless it fell below $10. Here's an overview of what I regard as the key points for consideration before investing in Facebook:

1. Revenue is decelerating. For a company with a P/E ratio of over 100, I find this to be unacceptable. If revenue is going to be decelerating, the P/E ratio needs to be a lot lower, as the growth potential to justify a triple digit P/E is simply not there yet.

2. According to eMarketer, Google (GOOG) could overtake Facebook (FB) in display ad revenue as early as next year. This is another sign that the company's triple digit P/E ratio is not justified. If Google is on pace to overtake Facebook in display advertising revenue - Facebook's current primary source of revenue - should Facebook really have a higher P/E ratio than Google? Google's P/E is under 19 at the time of this writing. If Facebook were to be given the same P/E ratio, it would be valued at $5.74.

Of course I do find it unlikely that Facebook will fall that far, although I do think these numbers illustrate the point that Facebook is far overvalued and ripe for an even larger decline. Outside of the points mentioned above that pertain to Facebook's existing revenue growth, there are two major business model flaws the company faces: intent and niche.

1. The Intent Problem: I highly recommend those bullish on Facebook take a close look at the idea of the Intention Economy. To summarize, Internet businesses thrive when they can clearly brand themselves as a destination that satisfies an intention. Looking to buy used goods at an auction? EBay (EBAY). Looking to buy cheap stuff in your area? Craigslist. Looking to buy anything imaginable conveniently and at a reasonable price? Amazon (AMZN). Looking for options? Google.

In contrast, Facebook has branded itself as a place to keep in touch with your friends and family. As valuable as this is - who amongst us doesn't value friends and family above almost everything? - it is not easily monetized. It is almost antithetical to monetization. Perhaps there are some opportunities in group buying as that is an activity often done with one's friends and family, although Groupon (GRPN) and LivingSocial appear to be winning the branding/intention war there. I believe Facebook's largest problem surrounds this issue of intention. This is a theme I suspect will only grow in significance, and will be faced by many other social media peers - most notably Twitter, whose IPO should be in the works.

2. The Niche Problem: This is a contrarian view at the moment, and is largely my subjective take based on my experience in Internet marketing and web development, but I believe social networking is not a network good in that more users does NOT equal a more valuable product. Rather, it is more quality and relevant users that equate to a better product. As quality and relevance are highly subjective terms, I believe niche social networking is where the future lies. Put another way, I believe the value of many of these social networks declines as their user base grows; growth provides additional costs, but makes the social network less capable at delivering a niche experience and selling corresponding niche goods and services. From this perspective, a thousand niche social networks are collectively worth more than one single massive network that attempts to create many sub-niches. I believe market valuations will correct themselves to reflect this situation in due time.

Facebook's Ray of Hope: Facebook Credits

There is one initiative within Facebook that I do think could save the company and justify its current valuation: Facebook Credits, the firm's virtual currency. Virtual currency is the biggest opportunity in all of social networking, in my opinion. I elaborated on this viewpoint in a previous article on SeekingAlpha. As the nation-state currencies are all in deep trouble for which they are trying to inflate their way out of, there is an opportunity for new currencies - whether this is gold, Bitcoin or something else. I do believe what is ultimately needed is a social network, with its own central bank, that issues and manages a currency that is partially backed by gold (I believe a central bank is needed because gold is currently too volatile for a currency to simply be pegged to the floating price of gold).

I don't find it likely that Facebook will pursue this avenue in any meaningful way (although it is taking the step of allowing Facebook Credits to be used to purchase digital media on Facebook). Ultimately, Facebook is backed by Goldman Sachs, is a supporter of CISPA, and is a publicly traded company. This is not the kind of organization I think has the political will to take on the world's monetary authorities. I do hope I'm wrong, as if Facebook is up for the challenge, it will easily be worth an order of magnitude greater than its all-time high.

Source: Facebook Is A Buy ... If It Can Fall To $10