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GM Crashes Into the Facebook IPO

It raises questions about ad revenue at a delicate time


According to The Wall Street Journal, General Motors (NYSE:GM) said it will nix its $10 million advertising spend on Facebook because it believes the ads are ineffective. While GM’s business represents a tiny part of Facebook’s revenues, it should be a concern for investors.

Keep in mind that Facebook has already seen a deceleration in its growth. In the first quarter, revenues came to $1.06 billion, which was down from the prior quarter’s $1.13 billion. On a year-over-year basis, the increase was 45%, but that revenue growth was 88% in 2011.

It seems far-fetched that advertisers are going to abandon the platform. With over 900 million users, Facebook is too big to ignore. The problem is that brands may focus more on using their company pages to engage their fans, which is essentially free. Indeed, GM says this strategy still has lots of value.

Something else: The GM loss has a symbolic impact. It’s the No. 3 advertiser in the U.S., behind Proctor & Gamble (NYSE:PG) and AT&T (NYSE:T). So, other brands will take GM’s move seriously and probably evaluate their own campaigns. It could mean even more pressure on Facebook’s business.

However, the GM news won’t derail the IPO. All in all, it looks like the deal is seeing huge demand, and Facebook has not only hiked the offering price range but it’s also increased the number of shares it will sell. So, for investors who are thinking of holding onto the stock for the long term, it may be worth waiting before buying  and evaluate the shares’ performance over the next couple quarters. If Facebook’s revenues continue to slow down, it could mean big trouble for the stock price.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”, “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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