No Friend of Facebook

NEW YORK (TheStreet) -- Facebook (FB) has so many red flags waving I feel like I am at the opening of the Beijing Olympics.

The first issue is the administration of a $100 billion public company by a 28-year-old void of previous public executive experience. Are you nuts? I don't care how smart he is, Wall Street is paved with unequivocally ingenious people who founder as CEO. There is a good reason why the first question asked in a job interview is, "What experience do you have?"

Usually a reply of "None" results in learning how the fryer gets cleaned, not an offering of regional manager. The first red flag is inexperience; when someone is new, wait until after the first major blunder to scrutinize his or her efficacy before investing.

The second issue is 955 million active users, up from 901 million at the end of March. That's all fine and dandy but other than using Facebook resources, are they adding any real value? With almost a billion active users, I believe each additional active user added is, on average, less valuable to Facebook from an earnings point of view.

If, on average, the most affluent and valuable customers for advertisers are already users, who is signing up? If so, who cares if another 200 million users are added if they can't buy anything (or as much) from advertisers? (Read Surviving Zynga in a Facebook World.)

The concept of diminishing returns should flash piercing blue and red in your direction. The larger the user base becomes, the more expense Facebook incurs, while at the same time lower revenue per additional user. The cost of adding an additional user is likely small enough to avoid a loss, but if Facebook is experiencing diminishing returns it is a tenacious hill to ascend for investors seeking growth.

If we use a little accounting hocus-pocus and we pretend the stock compensation expense resulting from the initial public offering doesn't have to be paid, Facebook earned about 12 cents a share. Facebook earned 11 cents in the year-ago quarter. Starting at 11 cents and growing to 12 cents isn't what I call burning up the growth racetrack.

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