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"I'm mad as hell and I'm not going to take this anymore!"

Howard Beale in the movie "Network"
AND Steve Reitmeister about Facebook ( FB ) IPO euphoria. Especially as Apple (truly the greatest company on the planet) trades at just 10X earnings when you back out their large cash position.

This is a classic case of a great company, but a poor investment. Meaning that I am impressed by what they have built and think it is another great American success story. Unfortunately there is too much laughing gas pumped into the FB story that people can't see straight when it comes to what price to be paid for shares. And that is why it's ripe to be shorted.

Could it truly be worth more than $110 billion some day?

Yes. But the odds are just far too long on that. I don't want to bore you with all the forensic accounting on this one. Just consider some of the longer, more established and INFINITELY more profitable firms than Facebook who have market caps just under that of FB's.

Amazon ( AMZN )

American Express ( AXP )

Cisco ( CSCO )

Citigroup ( C )

Home Depot ( HD )

McDonalds ( MCD )

UPS ( UPS )

Visa ( V )

Walt Disney ( DIS )

Yes, this is eye opening. So it's clear that they need 1001 things to go right to deserve to be at these lofty heights.

Let me share with you what I believe are the 3 main reasons that Facebook will not be able to generate the profit needed to be worth the current valuation.

1) The only way to make more money is to advertise more to clients. And every step they take to advertise more to customers = higher invasion = lower satisfaction with the user experience. Certainly there is more money to be squeezed out of the company, but I think they will run into some speed bumps on this front.

2) Most people I know have gone through the following cycle with Facebook. So it's good that they are adding new members…but eventually most will become infrequent users. 

a. Discover it.

b. Become completely addicted to it checking in multiple times per day

c. Befriend everybody and their mother

d. Hate that they have befriended far too many people that they don't want to stay in contact with

e. Contemplate deactivating their account

f.  Become much, much less involved. Maybe checking 1-2 times per week.

And if you say to me that it's the younger generation that is hooked on Facebook, I say you are right. And when they get jobs and have families in the future, they too will use FB a LOT less often. 

3) In general websites that have "sticky" content do not command high advertising rates. Meaning that if the customers are too interested in the content on the site, then they actively click to the next page, photo, video etc and don't pay much attention to the ads. And if they don't pay much attention to the ads, then the rates they can charge for the ads will be low. (I have some experience with this as I have run Zacks.com since 2001. And headed our ad network sales team for 5 years). Remember that GM just pulled their ad buy from Facebook because they were ineffective. I assure you there will be many others. The end result will be much lower ad rates than most people are using in their Facebook business models.

This short may not pay off today. Or even a couple months down the road. But just like Netflix ( NFLX ) and Green Mountain ( GMCR )…there will be a day of reckoning. And that will be the first time that earnings or sales do not meet up with lofty expectations.

Note that I am only shorting a small position at this stage. That is because there may be some IPO euphoria that lasts for a while pushing shares higher. So I expect to short more shares down the road. That should probably be before the first wave of lock up folks can sell 91 days after launch. Quite often that selling action pushes down the share price.

Here is the only trick at this point. I have seen varying opinions of when people are able to short newly IPO'ed shares. They say it can be the first day IF the brokerage firm you are using has shares to pull from. Some will and some won't on day one. But probably within 3-4 business days those shares will be there and whatever entry price we get will be plenty attractive enough. So keep trying to put in your order and whenever it clears will be fine.

What is my target price? I suspect this will get a 25-50% haircut at some point down the road. The only question is when. I don't mind having it on the books for a long time to see it come to fruition.

Are you ready to take your rightful place in history by declaring that you shorted Facebook right from the outset? If so, then put in your trade.

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