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Facebook does a face-plant

May 28, 2013: 12:33 PM ET
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Shares of Facebook have stumbled even as the rest of the market rallies. But Facebook still looks overvalued.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

Sell in May and go away isn't working as an investment strategy so far this year ... unless you sold Facebook.

Shares of Facebook (FB) have plunged 12% in May. They hit their low point of the year Tuesday, even as the broader stock market was partying like it was 2006.

Facebook's stock is now down nearly 10% year-to-date. The Nasdaq, by way of comparison, is up 4% this month and 16% this year.

The social network's miserable May is even more astonishing when you consider that the stock actually got off to a great start this month. Facebook reported earnings after the closing bell May 1, and shares rallied more than 5.5% the next day as investors were apparently pleased by the growth in mobile ad sales.

But it's been downhill ever since.

Facebook's struggles are also in stark contrast to just about every one of its competitors. Google (GOOG) shares are up more than 25% this year and are near an all-time high. LinkedIn (LNKD) has soared more than 50% in 2013.

Related: Missed out on Facebook IPO and couldn't be happier

Even two perennial tech turnarounds are getting more love (or like) than Facebook. AOL (AOL) is up more than 20% as investors are betting that the company is finally on the path to sustainable revenue growth. And Yahoo (YHOO) has surged 34%. If CBS (CBS) is looking for a new sitcom this fall, might I suggest Everybody Loves Marissa?

What gives? I think one of Facebook's biggest problems since its initial public offering continues to be its valuation. Even after this year's face-plant, shares are still trading at a very lofty price-to-earnings ratio of more than 40 times 2013 profit estimates. That makes it more expensive than Google, Yahoo and AOL.

LinkedIn is apparently getting a pass from investors, despite its absurdly high forward P/E of nearly 120, because its earnings and sales are still growing rapidly thanks to a revenue mix that includes subscriptions and advertising.

Yes, Facebook is still an impressive growth story in its own right. But even though more people continue to sign up to the site, particularly via mobile, investors are still skeptical about how all those eyeballs (to go all 1999 on you) will get monetized. Earnings per share are only expected to increase by 7.5% this year -- even though analysts are forecasting a more than 30% jump in sales to $6.7 billion.

And while that revenue figure is impressive, especially for a company that is less than 10 years old, remember that the company has more than 1 billion users. The fact that revenue per user is still relatively low is a big problem for Facebook.

Related: Impressive growth for Facebook ... except for its stock

To put this in perspective, media giant Comcast (CMCSA) has "only" 51.9 million cable, Internet and voice customers. And analysts are forecasting sales of $64 billion.

Of course, Comcast and Facebook are not really competitors. But Comcast, unlike Facebook, is able to generate revenue beyond advertising because consumers are willing to pay a monthly fee for its service. Facebook is probably never going to charge consumers to use the social network. Nor should it. Users would probably leave in droves.

However, unless Facebook can find other ways to make money beyond advertising, it may never be able to live up to last year's considerable pre-IPO hype.

The company likes to talk about how much information Facebook has about its users and how that is useful to advertisers. That seemed to be one of the main reasons for excitement about Facebook's Graph Search tool, which lets users see what their network is posting about various topics.

But no matter how much Facebook tries, I think it will always face resistance from users to actually click on ads.

Related: Winners and (mostly) losers from Facebook's IPO

Ads will always be intrusive on Facebook in a way that they are not on Google. Think about it.

When you go to Google, it's usually because you want something specific to find. If you are searching for a plumber to fix a broken pipe, a list of plumbers that are in your zip code is helpful, not an annoyance.

When you go to Facebook, aren't you really just there to see what stories your acquaintances are reading, play some games and check out pictures they post? Maybe you'll want to vent about some pop culture phenomenon in semi-real time? Does anyone ever go to Facebook because they are hoping to find something to buy?

Now I'll admit to not being the biggest fan of Facebook. I personally prefer Twitter. But I am highly skeptical that Twitter will ever be a successful public company ... for the same reasons that I just gave about Facebook.

I don't know if ads on social media sites will ever be as effective as they are on search platforms. And I think investors realize that Facebook may never be able to be as successful as Google as a result.

The point of Facebook is that it's not a place for product placement, it's a place for friends. Oh wait. Did I just use MySpace's old slogan? That's probably a bit harsh.

Still, I've long maintained that Facebook is nothing more than a 21st century Ma Bell. It's a communications utility ... except it doesn't charge anything for allowing people to connect with each other.

That's great for Facebook users. But not for investors.

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Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

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