Facebook's books raise red flags for some investors

Facebook Inc. has opened its books to eager investors, but some don't like what they see. Profit margins have been shrinking. Costs have been rising. And the stock structure means that founder Mark Zuckerberg controls 57 per cent of the voting shares, giving him near-dictatorial power over the company's future. Other potential problems: Facebook does not operate in China, the world's largest social networking market. The company's regulatory filing this week also showed that it makes little money from advertising on mobile devices, which may soon be the primary way users access the internet and visit social networks. "Mobile advertising simply doesn't have the legs that online advertising has," said Nate Elliott, an analyst at Forrester Research. "If all the users moved to mobile, there's no guarantee they could make anything like what they're making now." Adding it all up, investors eager to get in on Facebook's initial public offering this spring are worrying the company will not be able to live up to the hype and sky-high prices that shares are expected to reach. "Emotionally, people will want to own a piece of it," said Tim Ghriskey, the chief investment officer at Solaris Group. "But this is a very speculative investment at this point in its life cycle." Strong appetite That said, appetite for the shares is expected to be strong during the initial public offering this spring. Facebook's 845 million users make it an internet superpower. The billions of ads displayed to users every day are a clear indicator that marketers believe Facebook's unrivalled trove of user data will let them connect with consumers in a way no other company can. "Their growth trajectory is huge," said AC Moore, chief investment strategist for Dunvegan Associates Inc. "This is the new kid on the block, and it's probably going to move into the centre of the arena." Yet certain kinds of growth are already slowing, while costs are going up. Facebook's base of daily users shot up 11.6 per cent in the last quarter of 2010, but that growth rate dropped by nearly half at the end of 2011, to 5.7 per cent. Most observers believe Facebook will not be able to sustain the ballooning expansion it has enjoyed for several years. At the same time, the cost of running its network of data centres has surged. In 2009, Facebook spent $2.78 (Dh10.2) per active daily user to power its service; by last year that number had jumped to $4.04. And because companies must constantly upgrade their servers to keep up with user demand, Facebook's costs may not ebb any time soon. The head winds facing the company are disconcerting because investors are expecting such enormous growth from it. While Facebook shares are not yet trading publicly, sophisticated investors have been able to buy them on private exchanges, where the prices last week valued Facebook at $90 billion. Many analysts expect the market value to go above $100 billion after the IPO. Most companies of that size have profits many times greater than the $1 billion that Facebook said it made last year. Google Inc., which is worth about twice as much as Facebook, had profits almost 10 times higher last year. Then there's Zuckerberg, the wunderkind who started Facebook in his Harvard dorm room at 19. Generally, when companies go public, shareholders gain a voice in determining future development. Facebook stock owners will have no such power because its stock structure keeps almost all the power in Zuckerberg's hands.