Beware of buying Facebook stock

Facebook finally made its stock market debut on Friday. The stock, initially available to select investors at $38 a share, closed at slightly above that price at $38.23 a share. Time will tell how investors really assess the stock. Most are probably waiting on the sidelines to see which way the wind blows.

Facebook won’t have to worry about me buying its stock. I strongly suspect the company is already massively overvalued at $38 a share. More importantly, I am not convinced that Facebook will be around in five or ten years. If the Internet has demonstrated anything, it is that web sites tend to be ephemeral. MySpace, which Facebook largely replaced, is a good example. Moreover, the web phenomenon of the moment is not Facebook, but Pinterest. You have to look hard to find web sites that have endured and remain profitable. Fifteen years ago Yahoo was phenomenal. Now it is hanging on, losing money, shedding employees and moving through CEOs at an alarming pace.

Facebook does have huge market share in part because it has figured out (it thinks) what people want in the way of a social networking site. It is already clear that it will never get everyone on the web. So many of its users are not active users. They have created accounts and then largely abandoned them, or check them out irregularly.  Of my 54 Facebook friends, on a weekly basis I see about 15 of them post or comment. Only three of them post regularly (every day or more). As I mentioned some time back, its user interface is confusing, although less so now than it was when I griped about it. Its privacy policies feel whimsical, giving you little confidence that your settings today will be there tomorrow or that your privacy policies will actually be handled correctly. Of course, Facebook is really about making money, so they keep trying new advertising strategies. The general thrust is to send you more ads and to make them more highly targeted. More and more, time on Facebook feels more like having a salesman regularly interrupt you while you are interacting with friends.

Its tepid IPO suggests stock analysts are right. To justify its price, it has to keep growing and more importantly it needs to convince advertisers that it can tie social networking and advertising together in a way that provides a unique advantage. General Motors gave it a try, and decided they just were not getting the return they wanted from advertising on Facebook, so they stopped using it.

Just how influential are your friends in convincing you to buy stuff anyhow? I like my friends just fine. I might see their dentist if they rave about him or her, because a personal recommendation makes choosing a dentist much simpler. But particularly with “friends” I rarely see in person, particularly those nebulous friends and friends of friends I have never actually met, and whose posts I mostly ignore, I doubt any attempt by Facebook to sell me stuff because my “friend” liked it will have any influence on me.

Facebook is also trying to make itself the center of your web experience. It is doing things like adding email (“messages”). Ideally, they hope you would never go anywhere on the web but Facebook. This of course defeats the whole purpose of the web, whose open nature is its key selling point. AOL tried this and failed spectacularly. Yet this is exactly the direction Facebook seems to be heading. Rather than be a utility on the web, it wants to largely replace the web by framing everything within a social context. However, the web is so much more than a social frame. It’s most about the ability to get information of interest.

I see Facebook as ultimately a limited business model simply because the premises on which it went IPO cannot be indefinitely sustained and population growth will limit its market. It’s bound to hit a brick wall eventually, and that time is likely to come sooner rather than later. Moreover, Facebook is no longer sexy. It has become ubiquitous and tired.

This is not to suggest that Facebook has no value. Obviously it knows a huge amount about its users based on what they choose to disclose and by analyzing what they do within Facebook, but this value diminishes quickly once it loses users. Its true value may be not in what it knows or can predict about your buying preferences, but by mining data among its users to determine trends. In particular, it should focus on thought leaders: those who set trends and convince others to follow them. Knowing what they and their friends care about is very valuable.

I suspect if Facebook is to grow that this is where it should be concentrating its resources. Operating as if users will not drift elsewhere as interest and whim takes them is delusional. Operating as if social relationships were all that mattered is also delusional. The history of the web suggests that users will move to another web site on a dime, which is why Pinterest is now a phenomenon, particularly among women. Pinterest clearly satisfied an itch for sharing information that Facebook simply had not thought through sufficiently.

To the extent that things endure on the web, it is because sites present tools that add value about the web as a whole. Particularly valuable is “meta” information: information about information. Google’s value is probably not inflated. This is because it can organize and present the Internet’s information in a coherent way that we need. Facebook does make it easier to keep and maintain social connections, but this is an ancillary feature of the web, not its heart. Information is its center.

As part of a balanced portfolio, perhaps owning some Facebook stock makes sense. As a strategy for acquiring great wealth, being heavily vested in it is likely to subtract from your wealth instead of add to it.

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