2 Big Problems Looming for Facebook

05/11/2012 2:00 pm EST

Focus: STOCKS

Michael Comeau

Editor, "Buzz & Banter", Minyanville

Heading into its upcoming IPO, Facebook must find a way to monetize its mobile application and further grow its already huge user base, says Minyanville’s Michael Comeau.

Everyone is waiting for the Facebook IPO, but will it be a good trade or a good investment? My guest today is Michael Comeau to talk about that.

So Michael, there’s a lot of hype about Facebook, and that’s not always a good sign for an IPO, but this one may be different. What are your thoughts?

The interesting thing about Facebook is that I think it’s actually coming public fairly late in its lifespan. I mean, they already have 845 million users, and their addressable market—you’re only going to have two or three billion people—so they’re already pretty far along in their growth.

When you think about it, a lot of these newer customers, they’re on mobile phones. They’re in emerging markets—very poor countries—so these are not the best advertising targets in the world.

Now, if you look in the S1 and you look at how revenue per user is growing, it’s starting to flatten out. And since user growth is slowing and that number isn’t going up, you’ve got a really bad recipe for a revenue slowdown.

You mentioned mobile, and I know one of the things they talk about in their S1 is that in mobile, they’re not making money right now. Is that a concern?

Well, they have to be in mobile, just because that’s what people want. But it’s absolutely a concern.

If I’m Facebook, I want people using it on their computers. I want them looking at ads, and when I pull out my iPhone, and I pull up Facebook, I see no ads. They’ve got to figure out a way to do that which doesn’t kill the experience, and that’s going to be their challenge.

How about the revenue growth in advertising? Do you see more people doing advertising on that, or you mentioned earlier it was starting to flat line, so how do they get around that? How do they start to make that arrow go up again?

I think more and more money is flowing online, and that a lot more is going to social media, but at the end of the day, if they don’t get enough people eyeballing those ads, they’re running into a wall.

So, how do they increase their user base from here? What do they do?

Basically, they need to figure out a way to grow the world population and get computers and phones into peoples’ hands. You laugh, but when you really think about how many people on this planet don’t even have running water, and you want them to have a computer and a smart phone and a tablet to play on Facebook? There’s just not that many people out there. They need bodies.

Finally, the stock price, whatever it comes out to be; do you have any numbers in mind where you think this is a good bet or a good trade, or a number where you’re staying away?

No idea until they update the S1, and they’ll probably include another quarter of data. If the monetization rates improve, then I think people will jump back on it, but for now, I’m very cautious.

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