Spotlight: Facebook

It is trendy for internet companies to get listed in the stock market and Facebook (NASDAQ:FB) is no exception. But is a trendy company also a good company to invest in? Facebook introduced its stocks at an initial price of $38 and saw its stock price fall to $18 within 4 months. However, Facebook noted an astonishing $72.91 yesterday. A quick look at this shows us the skeptical approach of investors at first, but after the first results were published investors were confident of Facebook's future performance. But it is likely that the current stock price of Facebook is overvalued. Facebook has a price/earnings ratio of nearly 80, indicating a very high price with relatively low earnings. The business model of Facebook also shows some flaws, which only increases the P/E-ratio. Facebook's main income is advertising income. To gain advertising income Facebook needs more clients. It is unlikely that Facebook can maintain their growth rate of new clients, hence the growth in revenue income of advertising is also unlikely to have a sustainable growth. As we often see with popular social networks (e.g. MySpace & Hyves (dutch social network)), they first rapidly expand their customer base through young people. At some time, 'older' people will also join these networks, making the networks less appealing to the young because it loses its cool-factor. This results in the young searching for a new social network and from there on the cycle repeats itself. Consequently, social networks have a hard time retaining their customers with the consequence of falling revenues over time. As Facebook already notes a decline in young people having a Facebook account, it is likely to assume that the same faith will befall Facebook in the future. The only way Facebook can avoid this, is by investing in other products. Facebook's CEO Mark Zuckerberg is aware of this threat if we look at how Facebook tries to counter this danger: he took over WhatsApp for a incredible amount of $19 billion. The problem is that Zuckerberg also announced he won't place advertisements on WhatsApp and also won't create other means of milking WhatsApp. Hence, the $19 billion is squandered on WhatsApp, destroying value for shareholders. Unless Facebook finds a way to enter other markets (there are speculations of a Facebook Phone) it has a hard time being sustainable and the share price will fall.