Not everyone loves Facebook as an investment

Fortune editor lays out 'a few glaring risk factors' for social networking giant

Social networking phenomenon Facebook enters the new year as arguably the tech company with the most buzz. Just in the past week alone we've learned about the brisk sales of Facebook shares on private-market exchanges, how Facebook has overtaken Google's main page as the most-visited destination on the Internet, and how investment firm Goldman Sachs just closed a $500 million funding round for the company. (Also see: Latest Facebook funding will fuel private-share market)

But not everyone's part of the Facebook lovefest. Over at Fortune, contributing editor Duff McDonald warns prospective Facebook investors that the social networking site might not be a slam-dunk success (cough, MySpace, cough). Since regulations restrict prospective buyers of some private-company shares to "accredited investors" with a net worth of at least $1 million, McDonald's insights may not be considered "actionable" to most readers. Still, he raises some good questions the rest of us can consider, at least academically. Here are McDonald's five red flags: 1. If Facebook is such a fantastic investment, why are people (or venture capital firms) selling their shares? Investors "cash out" all the time so they can invest in other ventures, but McDonald's not buying it. He wonders whether the early investors see indications that Facebook's growth has peaked and that the company is having trouble monetizing its more than 500 million users. As long as Facebook doesn't have to report financial results, outsiders are reduced to guesswork and reading blogs. I'm not sure which is worse. 2. Goldman Sachs Specifically, McDonald suspects the $50 billion price tag affixed to Facebook by Goldman is fictional. He certainly has a good argument there. Who really knows what Facebook is worth? Some people think it could be worth twice as much in an IPO. Others question whether the balloon will burst. 3. Zynga The simplistic, cookie-cutter games spit out by social gaming vendor Zynga -- Farmville, Cityville, etc. -- leave McDonald wondering if Facebook is pursuing a "lowest common denominator" strategy, which means low margins. Not a recipe for strong growth. 4. Just what are Facebook's numbers? What indeed. 5. Warren Buffett The legendary investor cautions against buying shares in companies with outsized valuations without first considering whether you would buy the entire company for that price if you had the money. In other words, if you don't think Facebook is worth $50 billion, why would you invest a fraction of that when the multiples don't make sense? You wouldn't, unless you were caught in the grip of Facebook fever. And if you are, you didn't catch it from McDonald. Or me. I think he's right to counsel caution about a company with tons of buzz, hype and cachet, but too many unanswered questions. So for those readers with a net worth of $1 million or more, consider yourself warned.

Chris Nerney writes about the business side of technology market strategies and trends, legal issues, leadership changes, mergers, venture capital, IPOs and technology stocks. Follow him on Twitter @ChrisNerney.

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