Questions you should ask before buying Facebook shares

We might just be hours from getting some information from Facebook about a possible IPO.

The market expects astronomical valuations for the king of social networking services – and like IPO valuations from LinkedIn, Groupon and the acquisition of Skype by MSFT, Facebook’s estimated value will be more or less based on rough guestimates from analysts about the future.

Facebook might be a great investment opportunity – or it might be the next Pets.com. Before you invest in Facebook, make sure you have solid answers to these questions.

Revenue
1. How does Facebook generate revenue – what is the business model?
    a. What different streams are there?
    b. Are there new streams? What are the plans for the years ahead?
2. Growth:  What are the plans to increase income?

Users
1. Facebook now has 800m users, according to its management.
    a. What is the age composition?
    b. Gender?
    c. Where are the users located? Asia, Europe, etc.?
    d. How’s the growth been in each of the segments and regions? 
2. What is the churn?
    a. How many people have closed accounts?
        i. We get the net users but give us gross and net numbers!
    b. How many are dormant?
        i. 1m
        ii. 1-3m
        iii. 3-6m etc
    c. What is the probability of a client becoming active when dormant for a period?
    d. Is there a particular segment of users more likely to become dormant?
3. User growth
    a. What are the plans for future growth?
    b. Is the growth opportunity emptied out?
    c. Is the business model Anglo Saxon? 
    d. How is the progress in Asia? Are there plans to conquer new regions, like China, where
        other social networking services are currently entrenched?

Management remuneration
1. How’s management going to be remunerated going forward?
2. Is this aligned with stockholders?

Regulation
1. There are new EU privacy regulations on the way. How will this and other privacy regulations 
    affect Facebook?
2. What is the consequence of deletion of historical data when a user deletes a profile?

The answers to these questions will help determine if Facebook is a great investment opportunity – or if IPO investors will be buying in at its peak.