Is Facebook stock a bad investment?

The social networking behemoth is preparing to launch the largest internet IPO in history — but some investors are starting to doubt the hype

Facebook Vice President of Product Chris Cox: The popular social networking site makes only $5 a year off of each of its 900 million users.
(Image credit: REUTERS/Mike Segar)

Facebook's feverishly anticipated IPO is expected to raise $10 billion and value the company at an astounding $100 billion. But Facebook's financial results for the most recent quarter show that the company's net income fell by 12 percent from the previous year, and that its total revenue dropped from the previous quarter. With Facebook's momentum seemingly slowing, some investors are poking holes in the assumption that Facebook stock is a sure bet. Also worrisome: Facebook is considering delaying its IPO to June, reportedly so that it can better focus on a recent round of expensive acquisitions. Is owning a piece of Facebook not as lucrative as it once seemed?

Beware these red flags: Facebook, with a "mind-boggling 900 million users," is absolutely huge, says Matthew Ingram at GigaOm. But the fall in net income is troubling; a company as large as Facebook should have "money flowing to the bottom line, and lots of it." Facebook has doubled its marketing and sales costs to extract more money from users, but it currently makes "a remarkably tiny amount from each one: About $5 a year." If it can't squeeze more out of its "existing user base," Facebook could begin to resemble a "red giant" star that "starts to consume its own resources and eventually implodes." Buyer, beware.

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