Facebook Users: You Are The Product, Not The Customer; Don't Be Fooled

Alas, the long-awaited social-networking event is here: the Facebook (FB) IPO. But will investors late to the game make money in the firm over the long haul? We're skeptical.

For starters, we're less-enthused about the prospects of investing in the social-networking giant due mainly to anticipated, speculative demand from the retail investor and a potential buy-at-any-price mentality. Still, the event has certainly piqued the interest of the social-networking nation -- even more so, in our opinion, than LinkedIn's (LNKD) initial public offering a number of months ago. Having increased interest in the equity markets isn't necessary a bad thing, but it does mean we'll probably witness a huge (and maybe unprecedented) post-IPO pop when Facebook begins trading (the investment banks are notorious for mispricing offerings to reward loyal clients). This, in our opinion, will drive prices to unsustainable levels. We strongly caution investors interested in picking up a few shares of Facebook post-IPO that the risk/reward will probably be tilted against them, and we fully expect a valuation disconnect (read "bubble") relative to its intrinsic value to grow materially over time.

Estimated to be worth more than $100 billion -- or about the size of McDonald's (MCD), or looked at another way, the size of Ford (F) and Boeing (BA) combined -- Facebook has a lot to do to justify such a high price tag, in our opinion. We doubt most of the 800+ million monthly active Facebook-users care to click (or even notice) the display ads (which generate 85% of the firm's revenue) on their respective pages. General Motors (GM) seems to agree, as it recently pulled its advertising with the social-networking giant.

In this light, we question the long-term benefits to marketers compared to more targeted ads offered by search-engine Google (GOOG), for example, where users go to search for the product they're looking for, as opposed to posting a status update for friends. After all, display advertising is not a new business model -- Yahoo (YHOO) created it years ago -- and we wonder just how long consumers will be willing to provide the most personal of information (age, location, gender, interests, etc.) to Facebook free of charge. We doubt most Facebook users know at this time that they are actually the product, not the customer, and we believe eventual enlightenment will alter the economics of Facebook's business model over the long haul.

Though the social-networking behemoth is currently very profitable (it had $1 billion in net income in 2011) and there will be a lot of excitement once shares start changing hands in the public markets, we think there are much better long-term risk/reward tech plays out there, like Microsoft (MSFT), Apple, and Intel (INTC), as examples-the latter two held in our Best Ideas portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Some of the firms mentioned above may be included in our actively-managed portfolios.