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Facebook IPO: Over-Hyped or a Good Investment?

Facebook opened its books for the IPO and the balance sheet was impressive indeed, but analysts say its shares could still be overvalued

The day that technology watchers have salivated over for more than a year finally arrived on Wednesday: the Facebook IPO. 

The social networking giant that revolutionized the way that human beings connect and keep in touch with each other in the digital age spilled its financial secrets as it filed to go public with the Securities and Exchange Commission.

In preparing to make its market debut, Facebook and its CEO Mark Zuckerberg were forced to pull back the curtain to reveal a Silicon Valley leviathan that boasts more than 800 million users and $4 billion in cash. Most impressively, the company's revenue has more than quadrupled over the past few years.

"For someone like me, today is the holy grail," Brian Blau, a technology analyst at Gartner, told TheWrap. "We've all been waiting for this opportunity to learn about the status of their business. Before this there were just leaks and rumors." 

The public documents show that Facebook has been growing at a steady clip, but analysts tell TheWrap that the dizzying pace at which the company acquired fresh users and forged new revenue streams has flagged. 

Also read: Wall Street 'Likes' Facebook IPO, But It's a Hard Climb From Private to Public

"They are experiencing explosive growth, but that growth is beginning to slow," Michael Yoshikami, founder of the investment firm YCMNet Advisors, said.

Prior to this week, the company's revenue and profits — if indeed there were any! — have been closely held. For the most part, investors "liked" what they saw. 

The numbers are certainly heady, particularly given the fact that the site is only eight years old. Revenue last year jumped 88 percent to $3.71 billion, but that's down from the previous year. In 2010, revenue increased 154 percent. 

Also read: Facebook Files $5B IPO on 8th Anniversary, Sits on $4B in Cash

Likewise, the company's user base has begun to plateau.

Yet, in announcing that it wants to raise $5 billion, Facebook is setting itself up for a valuation that could climb as high as $100 billion, Yoshikami said. He argues that even with its dizzying balance sheet, Facebook's true valuation should be more like $50 billion. 

"There's going to be a tremendous demand for shares, but people who buy shares at that rate are betting that Facebook can continue to build and grow by a lot," Yoshikami added. 

Others cautioned that investors rushing to buy a piece of Facebook were catching the site on the downward end of its trajectory. By trading on secondary markets reserved for elite investors for the past few years, Facebook prolonged the period of time in which it could focus on innovation and not share price. 

That is probably a good thing, as it allowed the company to introduce innovations like timeline and its news feed without worrying that the overhauls might spook Wall Street and send its stock tumbling.

The downside is that it limited much of the big profits to the very, very rich. 

As Molly Wood wrote in CNET, "Facebook's IPO will make some bankers, some venture capitalists, some privileged early investors, and some early employees rich. Everyone else should steer clear."

Others were more charitable about the effect that the secondary markets had on average investors. They maintain that they allowed Facebook to come to market as a stronger and more mature business than, say, pets.com, one of the notorious emblems of the turn of the millennium tech bubble. 

"With secondary markets what you are seeing is sustatinability is these business models," Ron Gong, managing director of the investment advisor firm Harris myCFO, said. "These companies have had their fundamentals tested." 

Analysts also stress that even though the Facebook supernova may have cooled slightly, there are still possibilities that the enormous wealth generated by its public debut will trickle down to the average investor. 

In particular, mobile seems to be an untapped and potentially massive source of fresh profits. Currently, virtually none of Facebook's  $3.7 billion in revenue is generated from mobile ads or other products. 

"There is an amazing amount of engagement that their users are showing and that represents a really big opportunity for Facebook," Blau said. "There are 100 billion friend connections with a huge amount of personal data. It's almost like this is a golden goose and if you screw it up, it will be sort of shame on you."