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Why Facebook Is Worth No More Than $7 A Share. All FB Investors Should Read This.

|Includes: Facebook (FB), GOOG

Its clear from FB's IPO aftermath that the hopeful price of $38/share vastly overvalued the company. To put a market cap in excess of $100 billion for a single-web site company is the realm of joke fantasy land. I cite 6 key reasons why I think FB should have a PE ratio of no more than Google at this point and reflective share price of around $7.

(1) Business model is flawed: At present Facebook is a company with a single internet property, its social networking site. It has a vast membership in excess of 900 million and is the most used site in many developed markets such as the US and the UK. As such where can it go from here? Its unlikely its existing users will use it more. Where will new users come from? No US internet company has been successful in China, and the strong existing social players in China mean FB does not have any realistic chance of developing here. Additional users will be from very emerging markets with low spending power and less interest to advertisers. So a very, very key concern for investors should be this. Given Facebook's penetration seems to be at its peak, why can't it generate more revenue? If it can only generate 4 billion or so from 900 million users, how will it get to the 20-30 billion USD revenue it needs to have to justify any valuation north of $20/share? My view is that users will switch off the site if FB tries to push more advertising and product promotions on users. I believe fun and business do not mix on the internet. Once you have provided a free/ad free experience like Facebook did (and one reason for its wild success), its extremely hard to either charge for it or fill it with advertising. FB realize this and state in their mission their priority is user experience. I feel they will never be able to monetize this to the extent necessary to justify the share price. GM and other advertisers realize this and are jumping ship to a forum where they can promote their brand more directly.

(2) Barriers to Entry are low: Facebook just bought Instagram for $1 billion, an internet site with less than 20 staff and no revenue. This demonstrates it fears new start ups hungry for a piece of the action. There are a hundred Instagrams out there, offering commercial free, charge-free experiences to users. The barriers to entry in this market are effectively zero. Imagine if Facebook started to try to charge its users in some way for staying on the site. A new start up would offer "Join our site and we will "scrape" your Facebook information to our site, tell your friends and you will have an ad free, no charge experience just like the old Facebook, and not be filling the pockets of 28 year old billionaires". This terrifies Facebook, hence their paying a billion for Instagram. But they cannot pay a billion for every cool start up out there without destroying their own balance sheet.

(3) No Mobile: This is an often touted weakness of the stock and its very, very real. Consider that for most people, all their "fun" internet time is now mobile. Increasingly desk top time is at work, where FB is either blocked or the time on the site is limited. I cannot see how FB can easily put ads on smartphone Facebook experiences; perhaps there will be a tablet offering with more space, but I remain skeptical. News that FB may launch its own smart phone is ridiculous for a company with no history in operating system or hardware integration design.

(4) FB Data a Goldmine: Much is written about the value of the data FB holds on its users. I do not buy it. Much of it is spontaneous and "like" data on people's ever-changing thoughts and it is very hard to relate this to actual buying decisions. Consider MasterCard and VISA have what should be the gold standard of consumer data. What people spend on what, where and with what regularity. Can they and do they leverage this? No. Privacy laws restrict in place in key markets restrict it.

(5) The FB IPO: The internet is awash with stories about how retail investors lost a portion of their life savings buying FB at an elevated price while Wall Street insiders and Facebook staff made millions. Reputation is everything for a social networking site, and a backlash is emerging and could grow, causing people to regard FB in a manner they definitely do not want to be regarded, especially as they are pressured into pushing advertising on the site and maybe even charging users.

(6) Finally, GOOG vs FB: Facebook has won the internet usage war and now people spend more time on it than Google. But FB is a "fun-site" and captures people when they are in chat, chill out and relaxed mode. While people spend far less time on Google, they are in a more practical frame of mind, ready to make buying decisions. Advertisers know this and respect the "search and click through" value of Google. There is no evidence that FB's sponsored ads or other ads will present advertisers with better value than space on Google, and a lot of evidence to the contrary. At best FB's revenue should be valued on par with Google's. At present the sales/market cap ratio for GOOG is around 5, with the figure for FB an inflated 15!

The above is a qualitative analysis of the share price, a detailed fundamentals-type analysis is not warranted at this stage for FB. It needs to be considered in terms of where it will be positioned in the internet universe in the future and I believe the above reasons are enough of a reason for investors to seriously doubt its current ratios. There is no reason to pay such a high multiple for this stock given these risks. Do NOT listen Wall Street analysts on this one, they have a vested interest in propping up the share price that was rammed down retail investors' throats on the IPO. Happy investing!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.