If you remember nothing else today, remember this:
Facebook doesn’t give a darn about its users. All it cares about is advertising revenue.
Harsh, I know. Especially since the company focused so intensely on increasing its user base from 66 million in 2008 to more than 700 million today.
But on Wall Street, money talks. And the way Facebook set up its business, the only money it gets is from advertisers.[ad#Google Adsense 336×280-IA]Facebook COO, Sheryl Sandberg, even confessed to Bloomberg BusinessWeek that the company sold out its users in favor of advertisers. Early in her tenure, she recounts that the top brass had a critical decision: To make either users or advertisers pay.
They chose the latter. As a result, the company is beholden to that group. Period. And such loyalty promises to topple the stock the next time an economic slowdown materializes.
Before Facebook, Google Was King
Google(Nasdaq: GOOG) has long reigned supreme over the online advertising world.
You see, while the company offers an indispensable flagship service – online search – it doesn’t make money from providing that. It makes money from advertising.
And this focus has paid dividends, catapulting Google’s stock from an IPO price of $85 in 2004 to more than $700 at its peak.
But guess what happened when the company endured its first recession?
Countless pundits were convinced that online advertising (and hence, Google) would be sheltered from the downturn.
In fact, at the time, one headline read, “Why Online Ads Are Weathering the Recession: In most media, 2009 will bring unkind cuts and Madison Avenue will never be the same. But internet advertising seems to be holding up.”
They were dead wrong!
In the second quarter of 2008, online advertising started to dip before suffering a dramatic drop in early 2009. And sure enough, Google saw its share price quickly follow suit.
I can assure you that Facebook is set up for a similar fall.
Get Ready for Facebook’s Flop
Before Facebook was around, Google had few challengers when it came to online advertising.
But according to comScore, Facebook now serves up one-third of internet display advertising in the United States.
In fact, companies are spending increasing sums of money with Facebook, and several customers are expected to spend more than $100 million each for the right to advertise on the social network this year.[ad#article-bottom]So the next time an economic slowdown hits – and advertisers start cutting back – what do you think is going to happen to Facebook’s stock?
Just remember what happened to Google during the last recession and you have your answer.
Bottom line: Forget the $100 billion valuation being bandied around for Facebook’s eventual IPO. As I revealed yesterday, while a slowdown in user growth is certain to undermine Facebook’s share price, an over-reliance on advertising revenue for its profits is what will really topple the stock.
So when the next economic slowdown hits, short Facebook’s stock immediately. Although we might have to wait for the opportunity, the profits promise to be historic.
Ahead of the tape,
— Louis Basenese[ad#jack p.s.]
Source: Wall Street Daily