Time to Sell Facebook (NASDAQ: FB)?

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Time to Sell Facebook (NASDAQ: FB)? By Jason Stutman | Monday, February 24th, 2014 In 2013, I wrote an article titled, "Facebook is Undervalued." My thesis surrounded the idea that mobile revenue growth would soon exceed market expectations and close the gap with desktop advertising. By the end of the fiscal year, that's exactly what happened — mobile accounted for 53% of company ad revenue in Q4, and total sales were up 62.5% from 2012. The market reacted favorably, and shares jumped from $24.66 to $68, where they're trading as I write this today. Now, it might seem like I'm taking this opportunity to boast, but in fact the exact opposite is true. Instead, I'd like to explain why the market has been far too generous. Now, let me first be clear that I'm not saying the ceiling is going to drop on Facebook today or tomorrow. In fact, the technicals would indicate we have a little more of a run up left. Shares are trading within a clear upward trend channel, and there is support at the moving 30-day average. Everything still looks pretty bullish on the surface. However, several flaws in Facebook's advertising model have recently come to light — and while we shouldn't expect an immediate impact, it's almost certain that as customers begin to catch on, they will flee from the social giant. Advertisement The One Retirement Plan Obama Can't Touch If you've already retired, or want to retire soon, I urge you to watch this video presentation before we have to pull it down. This "Secret $200 Retirement Blueprint" shows you step-by-step how to grow a monster-sized nest egg with a little time and a tiny grubstake. Click here to watch this video presentation now. The Value of a "Like" Though it may seem a bit ridiculous to many of us, Facebook "likes" actually carry a fair amount of monetary value for companies participating in social media. Every time a Facebook user "likes" a company's page, he becomes a designated "fan" of that particular company. Whenever that company makes a post, all of its fans can see its message on their news feed, essentially providing a platform for infinite and free advertisements. While it may seem difficult to put a clear number value on this kind of advertising model, it's actually pretty simple to figure out. Researchers at Syncapse Corp. recently released a white paper revealing the value of Facebook "likes" by comparing the purchasing habits of fans versus non-fans. According to the paper, the value of a "like" varies significantly between brands, with an average figure of $174 annually. (click image to enlarge) Now, there are three primary ways to gain these valuable "likes" on Facebook. The first is legitimate, the second is not, and the third is poised to come under scrutiny by Facebook's customer base. The first way to gain "likes" is through organic traffic. Users can search for a company like Coca-Cola on the Internet, find its Facebook page, and "like" it. This is a simple, legitimate, and effective way for companies to gain the attention of potential consumers. The second method involves purchasing "likes" from third-party companies known as click farms. A click farm is a form of fraud where large groups of workers in developing countries are paid incredibly low wages to surf the web. In the case of Facebook, this involves creating fake accounts to manipulate the system. This is particularly troubling for the company because advertisers want real customers behind those "likes," otherwise their value becomes diluted. Officially speaking, Facebook prohibits the use of click farms in order to maintain its credibility, but the ongoing creation of fake users has proven difficult to control. In 2012, Facebook revealed that an estimated 80 million accounts did not represent real people, and it publicized aggressive efforts to weed them out. By the end of 2013, these efforts proved futile as the number of false accounts reached 100 million — nearly 10% of the entire user pool. Facebook has since continued to take the public stance that it does not benefit from fake "likes." But as it turns out, this may not be the case all. Advertisement Bill Gates is Betting the House on THIS Breakthrough Technology Bill Gates, founder of Microsoft and one of the world's richest men, is betting the house on a new technology that could make you a pile of money. In short, Gates has declared this is the next world-changing technology. He believes it is so life-altering that soon we'll find one in every home. He even went so far as to launch an entire division dedicated to this technology at Microsoft. And here's the most important part: If you get in now, on the ground floor, this emerging technology could turn every $1 you invest into $4... $8... even $15 or more... Click here now to seize this opportunity. Facebook Fraud? The third method of gaining "likes" involves paying Facebook directly for promotional efforts. Facebook will advertise company pages to targeted users, and the "likes" come rolling in. At first glance, this seems like an organic way to gain fans, but it turns out many of the "likes" end up being fake regardless. In order to avoid detection from Facebook, click farms have begun to hide in a sea of fake "likes." By "liking" a random assortment of pages, click farms can hide their targeted campaigns. Unfortunately for advertisers, this means the majority of "liking" activity happening during many sponsored campaigns is the result of mindless clicks from a 21st century sweatshop. Recent investigative pieces from Derek Muller and BBC's Rory Cellan-Jones have confirmed that the majority of "likes" gained through Facebook's own promotional efforts are not actually genuine. The result is low levels of user engagement and increased spam that can often discredit a company. In other words, many companies are paying Facebook for virtually nothing. There have been allegations that Facebook has purposefully manipulated these campaigns to its own benefit, but that's making a leap. If this happened to be found true, it would certainly be an absolute nightmare for the company and investors alike. But the opposing scenario turns out to be even worse. If Facebook isn't purposefully inflating these campaign results, it means the company is losing control over the activity on its website. This is exactly what brought MySpace down from its throne a decade ago, and Facebook certainly isn't immune to similar parasitic user behavior. There was little doubt in 2013 that Facebook would grow its top line, but its ability to maintain these results is a completely different question. The organic reach of brand posts and user engagement on Facebook has dipped on a yearly basis, and that will begin to catch up with the company. With a growing amount of fraudulent activity plaguing the website, these issues will only get worse. We're looking at a 175% gain since first recommending Facebook last year. The company is now trading at a $175 billion market cap with an inflated P/E of 112.98. Shares are far more likely to fall down to $45 than they are to hit $100. This is a sell. Turning progress to profits,    Jason Stutman  @JasonStutman on Twitter Energy and Capital's tech expert, Jason Stutman has worked as an educator in mathematics, technology, and science... Before joining the Energy and Capital team, Jason served on multiple technology development committees, writing and earning grants in educational and behavioral technologies. Jason offers readers keen insights on prominent tech trends while exposing otherwise unnoticed opportunities. I liked this article | I did not like this article Follow Energy and Capital on The Bottom Line Related Articles Facebook (NASDAQ: FB) Stock Explodes Twitter IPO Announced? 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