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TheStreet Open House

Facebook: A Great Idea, but Not Yet a Great Business

NEW YORK ( TheStreet) -- The highly anticipated IPO of social networking giant Facebook (FB) forever changed the landscape of its market. But it became immediately legendary for the wrong reasons: the run-up was filled with hype and the IPO itself was mishandled by most of the involved parties, including Nasdaq, leaving small investors feeling shut-out and even ripped off.

The attempt will forever be a black eye for the stock, which continues to be one of the most polarizing tickers to follow as it attracts even more intrigue and controversy.

However, on Thursday, the company had an opportunity to put to rest some of these concerns by demonstrating in its second-quarter earnings report that its fundamentals in order and it deserves to be mentioned among the ranks of the elite or other tech giants such as Apple (AAPL), Google (GOOG) and Amazon (AMZN).

But it just couldn't -- at least not well enough to avert further valuation concerns.

Facing the Music

Though the company produced relatively respectable numbers, including better-than-expected revenue as well as an increase in active month users, it failed to impress investors who have been waiting patiently for the company to prove that it deserved their money. What the numbers showed was what investors have feared over the past couple of months -- revenue growth has slowed.

However, to the company's credit, it did beat on revenue -- just not by a meaningful enough margin. Analysts on average were expecting the number to arrive at $1.16 billion. Facebook reported $1.18 billion. Nonetheless, its 32% sequential increase is smaller than the 44% it generated in the first-quarter. While not an entirely disappointing number, it does (to some extent) support the notion of the company's perceived inability to monetize users.

Upon the report the stock got hammered -- to the tune of over 10% after-hours and falling below the $24 level. While it might seem as an overreaction to some, I think the concern by investors is somewhat justified. A deceleration in revenue for a company such still in its infancy should cause some anxiety -- particularly when projected revenue growth was broadly understood as the reason for the high valuation in the first place.

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