February 19, 2012

A SWOT analysis: Is Facebook a good investment - or not?

Facebook is about to become a public company and it means that you can invest in the future of Facebook. Buying Google, Microsoft, or Apple when those companies became public was a good thing and many investors got rich from doing it. For example, $100 invested in Microsoft in 1986 is now worth $49,216. Can you expect the same profits if you invest in Facebook? To find out, one way is to make a SWOT analysis:

Facebook ($FB) Stock Chart

Strengths
  • 845 million users - Facebook can sell statistics about these users to external companies. And it is hard to create a competing social network. A social network needs users, but to get users, you already need to have users
  • The revenue has been growing with 50 percent each 6 month period and the revenue was $3.71 billion in 2011, up from $1.97 in 2010
  • Many people are negative to buying the Facebook stock, but isn't that a good thing? Buy when no-one else wants to buy, like at the bottom of the 2008 stock market crash
  • Some people are making money when advertising on Facebook. One guy created a simple ad in 30 minutes, paid $150 to Facebook, and made $10,000 from the new customers. Read more about it here: Brendan Irvine-Broque
  • Can save lives: How Facebook helped to save 8 people's lives

Weaknesses
  • High valuation $75-100 billion - can Facebook grow more to justify this valuation? The profit was $1 billion in 2011 and $606 million in 2010. The p/e-ration is then about 75 to 100. Peter Lynch once said that one should buy a stock if the p/e-ratio is lower than the growth in profit. The growth in profit for Facebook was 65 percent from 2010 to 2011. So the valuation is a little bit high
  • Some say Facebook is evil and are collecting information about the users, and it's difficult to remove content you have uploaded to Facebook
  • How many are the active users? Some people have multiple accounts and I have heard that some have up to 40 accounts so they can cheat in Facebook's games. Facebook themselves says that there are more than 83 million illegitimate accounts - or 9 percent of the total accounts 
  • Facebook make most money from ads - but how many ads would the users want to look at?
  • Retailers have begun to shut down Facebook stores
  • Some people are not making money when advertising on Facebook. One company tried to advertise on Facebook, and they realized that 80 percent of the clicks on the ads came not from people - but from computers. Since you pay Facebook per click on the ads - why should you pay when the computers click on the ads automatically? Read more about it here: Limited Pressing
  • The CEO Mark Zuckerberg has a long-term vision for Facebook - but his employees may not have that. The employees at Facebook accept modest salaries in exchange for equity in the company. When the stock price is falling, the employees may get desperate since they are losing money, and they become more short-term

Opportunities
  • Facebook are innovative and can add features to their business model
  • You can't access Facebook in countries such as China - but it might change in the future
  • Facebook could become the next new operating system (OS) - similar to what Windows and iOS are today. You will need one of the old operating systems to run Facebook, but Facebook can replace much of what the old operating systems are doing today 

Threats
  • The business model is weak - it's easy to change to another service such as Google+
  • MySpace might be back again and has been growing lately with 1 million users in 1 month. Justin Timberlake bought a piece of MySpace in 2011
  • Other Social Networks such as Luluvise which is like Facebook but women only
  • You can't be anonymous on Facebook, which is why some people prefer Twitter
  • Dependent on companies like Zynga who contributed with something like $500 million to Facebook in 2011 through games like Farmville. What happens if something happens to Zynga?
  • The job market in Silicon Valley (where Facebook has the main office) is hot. It's not difficult for skilled employees to find better opportunities compared with the opportunities at Facebook. Three key employees recently left the company - the director of platform partnerships, the marketing director, and the mobile platform marketing manager
  • 19 analysts rate the stock as a buy, 15 as a hold and 1 is a seller. It's difficult to determine whether this is a positive sign or a negative threat to Facebook? Should you follow the analysts - or not? One analyst says that the Facebook stock is only worth $5

Confused? If you are still confused, you might be interested in this article:

Source: Mashable, The Guardian, Uncrunched, Wikipedia, Mashable, Techcruncht, ReadWriteWeb, BBC News, Reuters, theEword, Vimeo, SeekingAlpha, SeekingAlpha

If you thought this SWOT analysis was interesting, you will also like the following SWOT analysis: TwitterMicrosoftSolarCityTesla Motors