Facebook Stock Faces Valuation Issues

stock marketSocial media is hot and growing, but making money from it is another story.

The much-anticipated and overly hyped initial public offering (IPO) of Facebook, Inc. (NASDAQ/FB) is set to roll in today, May 18, 2012, following the company’s road show that helped to drum up excitement and, in the process, drive up the offer price. My stock analysis is that Facebook is clearly the most hyped up issue since the debut of Google Inc. (NASDAQ/GOOG) in August 2004.

The offering was increased to around 421 million shares with massive over subscription. The offer price will be in the $34.00 to $38.00 range. At this price, Facebook is valued at about $100 billion versus the $207-billion market cap of Google. Yet, when Google first appeared, the market cap was a mere $32.6 billion, which was significant at that time; but, when compared to Facebook, it appears to be much more reasonable, based on my stock analysis.

My stock analysis is that Facebook is not exactly making tons of money from its 900 million users. In other words, the company has yet to figure out how to drive revenues from its users the way Google has done with its advertising and other broad Internet services and assets. Perhaps Facebook will be able to evolve over time given its access to capital; but, for the time being, I really question the market value assigned based on my stock analysis.

Facebook will need to expand its revenue stream away from being predominately advertising, but my stock analysis is that this will not be easy, as more experienced companies such as Google also want to expand into the social networking space currently dominated by Facebook. There’s also the excellent “Skype” service that is owned by Microsoft Corporation (NASDAQ/MSFT), but has yet to be fully harnessed. However, in my stock analysis, this could change. You can read my thoughts in, Should Apple Worry? Microsoft Targets Mobile Market.

My concern, shared by many others, is regarding Facebook’s soft advertising sales and its failure so far to enter China. Just ask Google about China.

Aside from the need to expand its revenues base, Facebook needs to increase its user base. The 900 million users are impressive given the short eight-year history of the company, but the real growth will be the ability of the company to get into China. My stock analysis is that this will not be easy.

You all know how much I like the social networking space and its potential for enormous growth in China. The statistics don’t lie, as the country is tops in the world, with a whopping 505 million on the Internet at the end of November 2011, according to the China Internet Network Information Center. The number of broadband users stands at around 15.51 million users, up 18.6% year-over-year. There are also over 340 million smartphone users.

About 58% of the Internet users in China roam the Web via their cell phones, according to the State Council Information Office. These are massive numbers, according to my stock analysis, and point to the staggering growth of the Internet and related services in China.

My stock analysis is that the market in China is ideal for Facebook. The problem will be to appease the Chinese censorship and strict privacy rules and this will not be easy.

Facebook is also making headway in India (Facebook’s third largest market, with 45 million users), with its population of over 1.18 billion people. India is estimated to surpass China by 2025 and hit a staggering 1.6 billion by 2050, according to the BBC. What makes India attractive is its democratic government, young and educated workforce, and high literacy rate at 71.7% for those seven years and older, according to the country’s Ministry of Statistics and Programme Implementation.

Today, Facebook will deliver huge trading profits with a massive surge at the open. My stock analysis is that the company will need to produce stronger results to justify the share price.