Facebook is revving up for what many expect will one of the biggest initial public offerings in history, but many analysts believe that the company that revolutionized social networking will have a tough time maintaining its explosive growth.
"I can't predict the future, but I know the patterns of the past," Clive Thompson, a columnist for Wired, told TheWrap. "If you look at history, every major high tech company had its soaring moment in the sun and then fell apart when someone came along and thought of something that they couldn't imagine anyone would want to do."
For the present, of course, Facebook certainly does appear to be at its zenith. With a valuation of more than $100 billion and IPO shares expected to trade at between $34 to $38, Wall Street is breathlessly anticipating ringing the bell on the internet giant this Thursday.
Moreover, unlike Pandora or Groupon, both of which had stumbled with their public debuts, Facebook is that rare Silicon Valley darling that hits the NASDAQ when it is actually profitable.
Facebook reported its profits were north of $200 million in its most recent quarter on more than $1 billion in sales. The site also surpassed 900 million active users, proving it is no flash-in-the-pan phenomenon.
Yet from a problematic effort to generate revenue from its mobile user base to a youthful CEO in Mark Zuckerberg, whose recent road show to investors left many cold, the company looks like it may have a bumpy trip on the road from public to private.
Before putting the broker on speed dial, here's five warning signs to keep in mind before Facebook's IPO.
As it prepares to go public, Facebook may be on the tail end of its meteoric rise to the top of the social networking heap.
To be sure, the gains that the Menlo Park, Calif.-based company has made in less than a decade are nothing short of astonishing, but if those great strides had only taken place while the stock was open to a much larger pool of investors, the market would have really had something to crow over.
After all, revenue surged 88 percent year over year in 2011 to $3.71 billion, while net income jumped a massive 65 percent to $1 billion. But analysts say that as Facebook's user base begins to reach a critical mass, that kind of pace will be nearly impossible to replicate.
"They missed their window," Francis Gaskins, president of IPODesktop.com, told TheWrap. "This would be a much different situation if they went out a year or two ago. Now their ad revenue is flat, they're not going to double their users, and they're growing in underdeveloped areas of the world where no one who wants to advertise cares about."
The big markets that could spur real foreign growth for the company, namely China and Russia, present their own challenges. Facebook has had some success in Russia, but it faces stiff competition from rival social networking site VKontakte. The situation in China is worse, where it remains blocked by the country's government and inaccessible to its burgeoning population.
To be fair, two years ago, the worldwide markets were in free fall, which created a chilling effect on IPOs, so Facebook may have had no choice but to hold off on its public debut. Still, investors can still dream about what might have been if they could only turn back the clock.
Facebook has a sprawling and engaged user base, which is often catnip to advertisers. However, the company's ad sales dipped 7.5 percent in its most recent quarter as overall revenue slowed.
Not helping matters was an announcement by General Motors on Wednesday that it will pull its ads from Facebook after determining they failed to entice enough users to buy cars.
As a private company, Facebook was somewhat immune to the seasonality of the advertising business, but once it's beholden to a broader network of shareholders it will face enormous pressure to not just sustain its sales figures, but grow them on a quarterly basis.
If the company begins to hawk products more aggressively, a significant number of Facebook's user base may start hitting the dislike button.
"They’re simply not growing ad revenue way they were before," Michael Yoshikami, CEO and founder of Destination Wealth Management, told TheWrap. "It's an unproven model, so it's not clear how much users will tolerate if ads become more intrusive. In the technology world, whenever you push advertising hard, you encounter resistance."
Unless Facebook is able to start selling movies, music or games at a dramatically faster clip, any squishiness in advertising will be a big problem. After all, advertising comprises more than 80 percent of Facebook's first-quarter revenue.
One natural place for Facebook to goose its profits is mobile advertising, but smartphones have remained stubbornly resistant to the display advertisements that pump up sales. Compounding the issue, the app the company launched last fall has had well-publicized kinks.
Fixing the mobile situation is priority number one for the company, analysts say, particularly as research from the likes of ComScore show people are spending more time on Facebook via mobile devices than they are on desktop computers.
"Facebook is a legacy product that is designed for the desktop, but their handling of the mobile situation has been a colossal mistake that shows that Zuckerberg knows nothing about product development," Gaskins said. "I don't think it's going to work, but their response is 'trust us, we’re going to work it out later.'"
To that end, Zuckerberg plunked down $1 billion for the photo-sharing app Instagram this spring, but that purchase faces regulatory delays and has left some analysts carping that the young CEO overpaid.
CEO CULTURE CLASH
If Mark Zuckerberg makes shareholders money, nobody will care what style of sweatshirts and footwear he favors. However, his blasé attitude during the company's roadshow to investors recently, not to mention a decision to skip a planned Boston stint, struck a discordant note.
Among the Facebook founder's perceived sins were his decision to wear a hoodie and keep audience-members waiting while he went to the bathroom.
At 28, Zuckerberg is a technological wunderkind, but he's more accustomed to the looser Silicon Valley zeitgeist than he is with the more buttoned-up style of Wall Street. That could lead to a sizable culture clash now that he is beholden to investors, who will heavily scrutinize his company's every earnings report and who are likely to be more concerned with net income than dazzled by any nifty overhauls to the timeline feature.
Yet, with 55.8 percent of the voting power in Zuckerberg's hands, anyone who bets on Facebook is also gambling on its ginger-haired CEO.
"You are banking on one person's vision," Yoshikami said. "The issue with Facebook's leadership is more of control. Zuckerberg owns a majority of shares, so whatever he decides, in all likelihood, that’s what's going to happen. That's an awful lot of power concentrated in one person’s hands."
THE NEXT FACEBOOK?
From his Harvard dorm room less than 10 years ago, Zuckerberg upended one system of social interaction and replaced it with another of his own devising. As every technological revolutionary from Henry Ford to Bill Gates has discovered, however, there's no monopoly on the next big idea.
Brian Blau, an analyst with Gartner, is bullish about Facebook's longterm prospects, but even he says that the company inevitably will have to keep innovating if it wants to stay relevant.
"At some point Facebook penetration is going to level out and users are going to level off in their enthusiasm for the social network," Blau said. "There are only so many friends you're going to have and there are a maximum number of minutes available to devote to Facebook. So what do you do with people that don't want to interact anymore?"
Moreover, what do you do when something new and shiny arrives to replace Facebook and Twitter? Though it won't spoil the Facebook IPO this week, that kind of seismic shift is inevitable, analysts say.
"Something is going to come along that Facebook or Twitter did not recognize was a problem, and I'm not saying theses companies will vanish, but they're not going to be the dominant force driving our culture anymore," Thompson said.