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More Users = Less Profits? – Facebook Inc (FB), Google Inc (GOOG), Microsoft Corporation (MSFT)

The most disconcerting number in the company’s earnings report was, while advertising revenue grew 41%, payments and other fees were flat on a year-over-year basis. Since many have argued that Facebook Inc (NASDAQ:FB)’s future could lie in payments, selling goods and services, and other features, this lack of growth in areas other than advertising seems to punch a hole in that theory.

Mobile Is Heralded As The Future And Facebook Should Be Worried
Many people took Facebook Inc (NASDAQ:FB)’s increase of 57% in mobile active monthly users as a positive sign. Let me dispel that myth right now. Relative to their competition, Facebook Inc (NASDAQ:FB) is arguably in the worst position for mobile success.

Think about their competition’s business models. Google rules mobile search and they get paid per click. Even if the company makes less on advertisements, they still are able to make money. Their YouTube, Gmail, and Google Inc (NASDAQ:GOOG) Maps properties are all suited well for use on mobile devices. Microsoft Corporation (NASDAQ:MSFT)’s Windows 8 system works across PCs, tablets, and smartphones. Yelp’s business model works perfectly on mobile devices because potential customers can read reviews of businesses while they are out shopping for goods and services.

What do users do on Facebook Inc (NASDAQ:FB) mobile? Honestly, 99% of the time they update their status, upload pictures, or check-in. Facebook Inc (NASDAQ:FB) makes exactly nothing off those actions. In addition, the Facebook app shows much less advertising since there isn’t enough screen real estate for side bar advertisements. Instead, the company must use in-line advertising. While this would seem to be more targeted, the company can’t possibly show as many in-line advertisements as they would on the full Facebook web page.

Avoid The Craze
Facebook Inc (NASDAQ:FB) doesn’t appear to be the huge opportunity that many financial commentators would have investors believe. The company’s stock still commands a forward P/E of 47. If analysts earnings growth target of 29% is correct, this wouldn’t be a huge deal. However, based on early results, this appears too optimistic. Even on a non-GAAP basis, the company’s EPS grew by just 13% in the current quarter. To reach 29% growth, they will have to massively cut expenses and the opposite has been occurring. By comparison, the only company in this space that looks more expensive is Yelp at over 109 times earnings.

Investors looking to make a good long-term investment should avoid the Facebook Inc (NASDAQ:FB) craze and look to Google Inc (NASDAQ:GOOG) or Microsoft. Google Inc (NASDAQ:GOOG) still sells for under 18 times forward estimates, and generates significant free cash flow. Microsoft pays a yield over 3%, and generates so much free cash flow that 34% of their market cap. is just the cash and investments on the company’s balance sheet. Facebook Inc (NASDAQ:FB) is a great service, but without huge changes it doesn’t appear to be a good investment.

The article More Users = Less Profits? originally appeared on and is written by Chad Henage.

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