Why Facebook's not a growth stock

By Sharon Machlis

Facebook as a platform hasn't been fun for me for a couple of years now, between a flood of information I don't care about (even from people I do) and that ever-changing, privacy-be-damned interface.

That's not to say I don't still check in regularly and enjoy some posts in my stream. But for me, Facebook has morphed into something akin to email or satellite TV: a utility that carries interesting and valuable information, but one that requires effort to extract nuggets amidst a sea of junk.

I know I'm not alone on this. And I think it's important to understand the difference between people who "love Facebook" and those who regularly seek the information they get from Facebook. Because these are not the same thing. A lot of Apple users are also true fans of the products as well as the company itself; replacement products won't do, as this 2010 video parodied (warning: numerous expletives make this not office-appropriate. But it's funny.)

Facebook? To many of us, it's annoying as well as useful. When someone posts a link to an interesting story, I'd like to click and go to that story -- not be told I need to install a Facebook app that will then broadcast everything I'm reading, as I've encountered more than once. I don't care what my Facebook friends are listening to on Spotify or what commercial pages they've liked in order to enter a contest. I don't want to know whether casual acquaintances have signed up to be organ donors. If someone else came up with a service that attracted enough users so I could get similar information from family and friends, I'd certainly consider moving.

Obviously, that's a big "if." The most impressive thing about Facebook these days is its market share. Although I remain skeptical about some of the user stats the company tosses around, fact is that Facebook still has the critical mass of users to make it a must-check for most people who do any sort of social-network activity. Wresting all those users away from Facebook would not be a trivial task.

But here's the thing: Huge market share is the hallmark of a utility, not necessarily a growth company. My electric company has enormous household penetration, but I wouldn't classify it as a growth stock. RIM's BlackBerry had the smartphone top spot once, but it's certainly hasn't shown a lot of growth potential since competitors figured out how to successfully expand and transform its niche. Microsoft still has huge desktop OS market share, but its market is no longer a high growth area.

Facebook, of course, priced its IPO very much as a growth company, even though its main appeal seems to be market saturation. That only makes sense if you believe

1) social networking will continue to expand at high growth rates;

2) Facebook is immune from competition in its space; and

3) Facebook can find innovative ways to increase the monetary value of all its users without ticking them off.

Do I? Not all three.

1) Yes, social networking in some forms will continue to grow and expand.

2) Facebook is probably secure in its top spot in the short term, although I'm not sure I'd make that bet for 5+ years.

3) Here's my problem with pricing the Facebook IPO as a high-growth stock. Facebook grew so fast and so large because its user base expanded and it found ways to monetize those users with ads and games. But its growth rate is already slowing and, as Washington Post columnist Barry Ritholtz pointed out in February, "The Facebook metrics for annual revenue per user were stunningly modest: Facebook picks up $5 per user each year. Compare that to Google, which garners more than $30 per user per year. Netflix takes in closer to $144. Is this why Facebook's annual revenues are so low compared to its 850 million user base?"

Facebook hasn't yet shown an ability either to react to changing market conditions -- just like many traditional media companies, they're grappling with how to make money from users on mobile devices -- or to boost the money it makes per user. And I just don't think solving these particular problems are part of Mark Zuckerberg's skill set. If I'm wrong, or Facebook brings in some executive talent who can effectively answer these challenges, Facebook may yet justify its sky-high valuation. But I think Ritholtz is closer to the mark:

"What I learned from Facebook's filing was that they have 161 million active users who actually go to Facebook.com each month. That's not shabby — but it's a far cry from the MAU claims of 850 million [Monthly Active Users, which includes people who click like on a non-Facebook website, even if they're not visiting Facebook.com]. That definition of active users is probably overstated by a factor of 500%. I suspect that the $100 billion valuation may be overstated by nearly as much."

Sharon Machlis is online managing editor at Computerworld. Her e-mail address is smachlis@computerworld.com. You can follow her on Twitter  @sharon000, on Facebook, on Google+ or by subscribing to her RSS feeds:
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