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TheStreet Open House

It's Time to 'Unfriend' Facebook From Your Portfolio

BALTIMORE ( Stockpickr) -- It's time to "unfriend" Facebook (FB) from your portfolio.

When the social network announced its IPO, I cringed. Not because the company shouldn't be publicly traded but because of the sheer number of buyers who wanted to buy the stock because "it's Facebook." Things aren't looking much better now.

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The fact is, Facebook doesn't deserve the lofty valuation that's been hoisted on shares in the last few months (even if they've made it a predictable trade), and investors who get caught holding the bag aren't going to be happy.

If you're still agonizing over whether to hit the "unfriend" button on Facebook's profile page, read on.

It's No Google

The biggest reason to unfriend Facebook is its price. The stock is expensive right now, plain and simple.

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A lot of that has to do with its model. When Facebook first started trading last May, the comparisons with Google (GOOG) were unavoidable. But Facebook is no Google, even if the reasons why are a little more nuanced than many investors care to notice. Google makes the lion's share of its money though ads -- users searching for coffee mugs, for instance, get sponsored results proffering coffee mugs. The fact that Google's paid business aligns users with their reason for being on the site is crucial; without that direct sales path, the sites value is greatly diminished.

Like Google, Facebook earns most of its money through ads. But the difference is that to generate clicks on those ads, Facebook has to distract users from their reason for being on the site (connecting with friends and stalking acquaintances) and convince them to click an ad instead. The fact that Facebook has to distract its users from their purpose for being on the site makes it inherently less valuable than Google.

If you look at the other social media success stories in the last few years, it's the exact same formula. LinkedIn (LNKD) is one of the best examples. That firm earns most of its money through premium memberships and fees for job postings. In other words, its main revenue model is directly in line with users' reasons for being on the site: hiring or getting hired.

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