Bluefield Daily Telegraph, Bluefield, WV

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July 30, 2012

Facebook’s fiscal slide looks familiar

(Continued)

Meanwhile, as Facebook invests in ways to generate revenue, its costs in the latest quarter rose 295 percent.

No matter how you slice it, those aren’t encouraging numbers. And the stock was hammered as a result, hitting a new low on Friday. The stock price dipped below $27 per share, well below its initial public offering high of more than $38 per share.

These figures do not indicate Facebook is on the verge of collapse. But for prudent investors, they are a warning. And the generally downward trend of Facebook’s stock since it first went public in May suggests buyers were attracted to the glamour of the company, rather than the bottom line.

A big problem with Facebook is its size. With so many users already in place, what is the company’s real growth potential?

And it’s worth noting all those users pay nothing to be Facebook members. Money is made only when businesses agree to post ads on the site, hoping to attract attention from Facebook’s massive membership.

But some companies question whether ads on Facebook really pay off, while some users worry about privacy and related concerns that occasionally crop up regarding the website.

Yet Facebook does have the potential to reverse its fiscal course. Its base of users represents a lucrative potential market — if truly effective ways can be found to tap into it.

On the other hand, the basic nature of modern technology poses a constant threat to high-tech firms such as Facebook. There was a time when a company called MySpace was the hot spot for social networking. Is there something out there poised to replace Facebook?

Personally, I’m inclined to follow Warren Buffett’s lead on such matters.

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Michel Olszak is a columnist for the New Castle, Pa., News.

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