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Are Facebook And Yelp Good Ethical Investments?

|Includes: Yelp Inc. (YELP)

The information age is here to stay. Sometimes, I'm tempted to call it the information-overload age, but that's a story for another time.

Not so very long ago, entire families often shared one email account (usually a parent's work account), jpeg images took several minutes to load, and the internet was a haven for geeks like me. Now, virtually everything is online. It seems like everyone has at least one email address and spends a significant portion of their lives on the internet.

The number of Facebook users is inching closer and closer to one billion. At least 50 million people currently use Yelp each month. Facebook is poised to make its initial public offering; Yelp already has.

Having a lot of users and internet buzz does not, however, make a web-based business a good investment. Experienced investors know it is much more complicated than that. And for readers of this blog, there are ethical issues to consider before buying as well.

First, let's take a long, hard look at Yelp (NYSE: YELP). Searching and reviewing local businesses is not a new idea; sites like Citysearch offered that opportunity to their users years before Yelp did. Yelp's popularity boils down to a cuter website, a catchier name, rewards for users who are the first to review a business or who are especially prolific, and far greater social networking capability than its predecessors.

Yelp made its initial public offering a few weeks ago. The stock immediately fell, and the chart has resembled a roller coaster track ever since. The company's business plan depends almost entirely on advertising, something many businesses have had to cut back on in recent years - and may eventually dispense with, since many consumers resent the prevalence of ads and a growing number use ad-blocking software to avoid them. Although Yelp's revenue has grown, the company is still not profitable, and growth will eventually slow to a crawl because there is a limited number of markets left for the company to bully its way into.

And I do mean bully.

Yelp has a history of using tactics that I, as an ethically focused citizen and entrepreneur, frown upon, as do my friends who have also owned their own businesses.

Yelp has already faced class-action lawsuits from companies claiming that Yelp employees offered to remove negative reviews in exchange for purchasing advertising. Some companies who declined to purchase advertising subsequently found that their positive reviews suddenly disappeared. Yelp also claims to have taken measures to prevent fake reviews, but in some cases, negative reviews have obviously been posted by rival businesses, or by users who have clearly never visited the business. One such victim is chef Graham Elliot, who received a one-star review of his sandwich shop before it had even opened - and who claims to have been forced off of Yelp on three occasions for responding to factually inaccurate reviews.

In the interest of full disclosure, a personal friend of mine has faced this sort of treatment from Yelp. Marla (not her real name) could not afford to purchase advertising, and suddenly found her three best reviews vanish. When she moved her business to another state, she updated the contact information on her business' Yelp profile…and soon discovered that the information had been changed back. Despite several complaints, this wasn't resolved for months.

An unprofitable company facing legal bills is a recipe for losses. Not only is Yelp a poor investment, the company does not qualify as ethical in the least.

Moving on…Facebook hasn't IPO'ed yet, but it will probably do so fairly soon. The company is profitable, but its entire business plan is based upon storing and selling user information to marketers. And while the site has more users than Google, there are only so many people in the world with internet access who would be interested in opening accounts - or able to do so. Facebook overconfidently mentioned China multiple times in its SEC filing, but cannot count on ever being unblocked by China's strict censors. And prior to Facebook, several other social networking sites flourished - I won't be surprised if Google Plus or another competitor eventually renders the site obsolete. For these reasons, I suspect the company could be overvalued.

Facebook is notorious for privacy issues - user accounts are simply not safe enough, as proven when Mark Zuckerberg's private photos were leaked. The company has already been taken to task by the Federal Trade Commission for sharing users' private information, and by privacy advocates for its previous refusal to remove users' profiles upon request. Additionally, ever since Craigslist banned ads for "adult services", prostitution has migrated to Facebook, prompting some concerned citizens to report Facebook to the FBI. And while Facebook did not cause the cyberbullying phenomenon, much of it takes place on Facebook, thus creating the possibility of liability. I wouldn't rule out future lawsuits.

I don't consider Facebook an ethical company, and I don't consider Facebook a wise investment, either. Investors wishing to profit from internet usage should instead consider established tech stocks like Cisco Systems, Apple, Microsoft, and internet service providers. They will most likely remain profitable no matter which social networks come and go.

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