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Facebook: Strong growth, but not compelling

morgueFile user penywise

COMMENTARY Unlike some other recent IPOs from Internet-focused companies, Facebook's IPO filing shows real revenues and profits. Those numbers are likely to drive a frenzy for the stock and a resulting valuation that could extend as high as $100 billion.

But even with revenue and profit, investors and analysts usually justify the types of high valuations that Facebook seeks on growth. And that's where Facebook could have some problems, as people wonder whether the company's performance will be worth the stock price.

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Growth? Yes, it's certainly there. But not at the levels that make financial wheelers and dealers smile. Facebook's expansion is more measured, and that could make many people think twice before putting their money down. In fact, there are some heavy hitter investors who are taking a pass on Facebook, according to Business Insider. They phrase it differently, but it comes down to concern about growth.

To best understand Facebook's growth, you need to look not at a year-over-year basis, but how revenue has changed by quarter because it offers the opportunity for more nuanced analysis. The company offered a quarterly breakout over 2010 and 2011. Here are the revenue numbers:

And here's a graph showing the trend:

Those graphs show fairly straight line growth. And there's nothing wrong with that. Many companies would love to have that history behind them. But Facebook isn't just some company. Many people look at it as an icon of the future. From that level of expectation, the numbers are scary. Why? Look at Apple and Google over their last four fiscal years:

Both companies show geometric growth, though of different scales. In each case, however, you can detect a upward curve in the results. Over time, each company, if it continues current trends, will amass more revenue far more quickly than straight line results. And straight line is what Facebook has. Look at the projection of what it would do should current trends continue:

By the end of next year, Facebook might be a $5 billion company. That's very respectable, but as technology investor Paul Kedrosky told Bloomberg, the trend line of daily active user growth in mature markets is slowing to a crawl that reflects user saturation.

As users saturate, revenue will as well, unless the company can find other ways to make money. And as the company has noted in its SEC filing, to date, non-ad revenue has meant Zynga (ZNGA). That's not encouraging for a company that needs to break out of its own mold. 

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