Facebook And The Email Snafu: A Troubling Trend?

| About: Facebook (FB)

Facebook (NASDAQ:FB) has a long history of rolling out updates that are often unpopular with a majority of users. The Timeline update, for example, was opposed by 70% of users in a poll. And as I established in my very first article on Seeking Alpha, Facebook is becoming less popular with the younger demographic. Worsening this problem, Facebook has a spotty record with privacy: after the Beacon fiasco, Facebook got in hot water again with Sponsored Stories.

For a website that's entirely dependent on bringing users back often, Facebook has gotten into somewhat of a bad habit: they do stuff their users don't like. Constantly. The latest problem was a snafu in which they replaced everyone's email address with a @facebook.com address:

For "consistency's" sake, the big blue giant decided arbitrarily that the address made visible for each user should be one they'd likely never used before and perhaps didn't even realize existed: the one Facebook had created for them to allow people to email their Facebook inbox. Sample format: ThisWasATerribleIdea@facebook.com.

If you had previously had an email displayed publicly - such as one that you actually use and prefer to be contacted at - it was hidden away.

Facebook may be facing another lawsuit. It turns out that some people's smartphones are automatically configured to sync email addresses with Facebook, and as a result, highly sensitive corporate may have been leaked.

"It is a very dangerous reality that I may intend to communicate something highly sensitive from my iPad or Android [device] and not even realize I am emailing you on your Hotmail or Facebook address instead of your corporate account," Chester Wisniewski, senior security adviser for Sophos, said by email.

People whose contact lists were altered found that messages sent never made it to their recipients.

Many users reported sending emails that were "lost in the ether."

The Troubling User Trend

For a long time, Facebook has been able to essentially do what it wished, because users had few other options. Facebook attracted new users not because people liked Facebook, but because people liked their friends -- who were on Facebook.

But with the proliferation of social networks like Twitter, Tumblr, and Flickr, users now have more options. As seen with MySpace, social websites tend to die off fairly quickly when users start to leave -- because users don't join and leave individually. They do so in bunches, following their friends to the next trend.

Previous reports of teens leaving Facebook for Twitter and other social networks were primarily anecdotal. But now there are more hard facts:

an analysis of additional comScore data suggests that the slowdown could be more significant and longer lasting. Falling traffic could be a concern to investors, who justify Facebook's high market value by pointing to its growth potential.

Tim Beyers of the Motley Fool extrapolates the data to a projected 2.69% decline in Facebook's Average Unique Visitors count, from 164.8M in Q1 to 160.4M in Q2.

Potential Explanation

For a long time, there have been people who hate Facebook but were locked in to the site for two reasons: (1) their friends were on it, and (2) there weren't many other options. But with the rise in popularity of other social networks, and Facebook's continued disregard for privacy and user preferences, it seems Facebook might have hit a peak, at least in the US.

On a brighter note for Facebook, the userbase in Japan has doubled. However, Facebook doesn't need "good" -- they need "great." With a P/E of 100 and a PEG of 3.47, Facebook's stock is priced quite highly. A P/E of 100 is unsustainable in the long term (think about what happened to other tech companies like MSFT and CSCO in terms of P/E compression). Just to maintain its current stock price, Facebook has to maintain a very high level of growth.

If the loss of US users continues, and if Facebook continues to create PR problems in the vein of Beacon, Sponsored Stories, and the email snafu, Facebook could be in for a rough ride. Investors would do well to follow Facebook's monthly user stats -- if they go down, or even move sideways, Facebook might be in for some significant P/E compression.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in FB over the next 72 hours.