A Few More Reasons to Avoid the Facebook (Nasdaq: FB) IPO

by Jeannette Di Louie

[caption align="alignright" width="220" caption="Like it or not, Facebook has to prove profitable and sustainable, two issues that are still in question at this time."]A Few More Reasons to Avoid the Facebook (Nasdaq: FB) IPO[/caption]On Tuesday, May 15, Investment U research contributor Gary Spivak asked a series of questions about Facebook:

“Can an entire industry or company that has been in existence for less than 10 years continue to grow at its current torrid pace? Will social media continue to stay “hot hot hot” or will it merge into the mainstream? If it takes a company seven years to “rule the world,” how long could it take a competitor to come in and simply be cooler or just plain better?”

Those are questions that many market analysts have been asking ever since Facebook (Nasdaq: FB) first announced its IPO back in February. And they have every right to ask them, too.

The social media site arguably has the most hyped-up IPO of the century and, according to some business writers, of all time. What’s even less disputable is that investors were salivating over the mere prospects of Facebook going public long before any such thing was declared.

But initial publicity and enthusiasm can only go so far. At some point, a company has to stand on its own merit.

Like it or not, Facebook has to prove profitable and sustainable, two issues that are still in question at this time.

General Motors Backs out of Facebook Advertisements

With mere days left until the big IPO, Facebook bulls recently received a piece of unexpected news to pause over. Apparently, General Motors (NYSE: GM) sees some issue with its advertising campaign on the site, and has pulled its $10 million out of the game.

Now, that could be for a large variety of reasons. And none of them are clear considering the car company’s refusal to address speculation and Facebook’s inability to do so, since it’s in its pre-IPO “blackout” period.

But it isn’t the only piece of bad news the social media giant had to deal with in the last few weeks. Back in late April, Facebook reported first quarter financials, which included a decrease in profits amounting to $28 million less than the previous year and a 6% decrease compared to the last quarter.

MarketWatch tech columnist John Shinal explains that “Facebook’s results over the last two years show a consistent pattern: Advertising revenue surges in the second and fourth quarters, respectively, yet slows or even weakens in the first and third calendar periods.”

Yet even so, it doesn’t change the fact that this was the first time profits dropped in at least a two-year time span.

Consumers Ok With Facebook Alternative in the Future

Again, one bad quarter doesn’t a trend make, but it’s slightly worrisome. So too, for that matter, is a recent Associated Press-MSNBC poll.

Apparently, despite the hoopla in the business world and even the obsession among consumers themselves, half of Americans think that Facebook won’t be sticking around for the long haul. About the same number also believe that the social network isn’t worth what CEO Mark Zuckerberg expects it to go for.

That cynicism shouldn’t be shrugged off lightly, either. In the ever-evolving world of technology, trends come and go extremely easily. For one example, take the evolution of musical recordings over the last few decades…

Just 30 years ago, records were still being made and sold. Yet since then, the market has seen cassette tapes come and go, CDs begin their slow but obvious death spiral, and MP3 take over the market.

Few people can say exactly what’s going to come next, only that something undoubtedly will… and probably sooner than later.

The same has been true of social media’s relatively short history. In 2003, the hip crowd was gaga over Xanga, an online journal site where people could share their thoughts and pictures with friends or their larger community. Next up was MySpace, which peaked in 2006.

And while Facebook has reigned king – with Twitter possibly as queen – for the last several years, who’s to say that will last?

Facebook might be able to beat the trend like its predecessors haven’t been able to… but it’s probably wisest to say otherwise all the same.

Good Investing,

Jeanette Di Louie

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