A Harvard Professor says that Facebook Inc (NASDAQ:FB) is a short because the company’s business model is not attractive to investors. Ben Edelman, Harvard Business School Associate Professor, says that Facebook is not doing as good of a job as it could targeting desktop advertising. He believes that advertisers will shift their business elsewhere.
That will result in a fall in share prices according to Edelman. Facebook Inc (NASDAQ:FB) is competing with Google Inc (NASDAQ:GOOG) for advertising dollars. That company has demonstrated its ability to turn advertising into revenue for its clients. If the professor is correct, Facebook’s recent gains may turn around in the coming months.
Facebook advertising problems
Edelman, who was quoted by Forbes today, says that if a company provides a valuable service customers will keep coming back for more. He says that Facebook Inc (NASDAQ:FB) is not providing the kind of service that advertisers will want to return to, and the company’s bottom line will suffer as a result.
Edelman says that Facebook will need to boost its own marketing budget in order to attract new advertisers to its service. The twin forces of increasing costs and declining revenue will hurt Facebook Inc (NASDAQ:FB) and it will result in pain for the company’s shareholders according to Edelman.
Edelman says that Facebook Inc (NASDAQ:FB) problems do not end with advertising. The company’s application developers are not being treated in a way that makes the business sustainable. According to Edelman, “Facebook’s ads for other peoples’ apps rest on a questionable foundation – there’s reason to doubt whether these ads are making money for app developers. An app developer follows a four step process: 1. Make the app; 2. Pay Facebook to advertise it; 3. Hope the user runs the app; and 4. Get paid.”
Facebook Inc (NASDAQ:FB) shares have done very well in 2013, rising by close to 90% since January 1. Investors have been happy with the firm’s mobile monetization efforts through the year and the new advertising formats the company has introduced. Edelman thinks that Facebook is a short despite those improvements in its business.
Shares in Facebook Inc (NASDAQ:FB) are trading at close to 200 times 2012 earnings. Investors are pricing a lot of growth into the company’s future. If Edelman is right, the company will not hit those targets and the price of the firm’s shares may drop as a result.