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It’s Still Hard to Like Facebook Stock

If you haven’t been paying attention, Facebook (FB) stock has been in a tailspin for more than a month now. Shares have fallen from about $29 in early May to the low $24 range for a roughly 15% loss.

The reasons are multifaceted, but the narrative is simple: Facebook stock is a bad investment because growth is very difficult to come by.

At the All Things D conference a few weeks back, Chief Operating Officer Cheryl Sandberg tried to spin the growth game — its user base increasing from 845 million to 1.1 billion during the past year, or the fact that 60% of Facebook users check in daily vs. 58% a year ago.

That’s nice. But the only growth that investors really care about relates to dollars and cents — that is, higher revenue and higher profit.

Social media is hardly a fad, and there clearly is money to be made in the space. LinkedIn (LNKD) stock is up almost 60% year-to-date and review site Angie’s List (ANGI) has doubled. Even one-time disasters Groupon (GRPN) and Zynga (ZNGA) have gotten some swagger back in 2013.

Yet Facebook has been left out. Beyond the declines in the past several weeks, FB stock has lost 25% in the past 12 months and 35% since its May 2012 IPO.

It’s the slow growth vs. high expectations dynamic that is to blame here. Consider that on May 1, Facebook earnings revealed that increasing its user base modestly isn’t paying off in the financials, sparking the recent decline in shares.

The details included a miss on earnings and a margin collapse thanks to the uncomfortable migration of users to mobile. While 70% of monthly active users were on mobile (751 million of 1.1 billion total), that mobile segment generated only 30% of all ad revenue — and as time goes by, that shift away from the desktop experience will become even more pronounced, with margins pinched even more.

In other words, even if Facebook is bringing in a few more users, it isn’t making much more money.

Then there’s the concern about critical mass. If users total more than 1 billion right now, the law of large numbers is working against FB stock. That’s 14% of the entire world! Do we really expect Facebook’s global penetration to double to over a quarter of the global population or triple to more than a third?

Maybe Zuckerberg does. But the rest of us living in reality shouldn’t. Consider a May Nielsen report indicating that 10 million users have dropped Facebook in the U.S. during the past year. Not encouraging on the global domination front.

Facebook still is growing, don’t get me wrong. Revenue should be up more than 30% in fiscal year 2013, and analysts have predicted 26% growth above that in FY2014. Earnings are growing much slower, but they are growing: an 8% increase is forecast for FY2013, then a 30%-plus bump projected in FY2014 … if longer-term projects pan out.

But given the challenges — not to mention the recent earnings miss — those estimates are not a guarantee. And let’s not forget that the big capital expenses right now have yet to bear any fruit. The biggest projects of the last few months — Facebook Home and Graph Search — have failed to gain broad appeal or generate substantial revenue.

Not to mention that after the IPO shenanigans a year ago, it’s safe to say investors still are skeptical of Facebook.

Facebook continues to circle the drain. FB stock has lost $40 billion in market value since the IPO, and the narrative is decidedly negative.

Some folks might be interested in bottom-fishing Facebook before its July 22 earnings, banking on the hope that the big expenses of the present will result in big gains down the road.

But that’s a big leap of faith to take. The prudent thing to do is to steer clear of Facebook stock right now.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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