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.

So now what will be the company's next move?

I wish Facebook would have offered something to help investors navigate through this disappointment -- it didn't do that either. Its outlook for the rest of the year is left up to best guesses. That is more reason for concern than anything else.

It means either the company does not know or it does not care to help mitigate what has been a turbulent first trading quarter with investors. I'm not sure yet which I think would be worse.

On the positive side, the company continues to grow its user base as that number reached 955 million active users as of June 30 -- representing an annual increase of 29%. But that means very little if Facebook is unable to get them to spend.

The company had warned investors of this situation -- even stating that analysts' expectations were too high. But investors were still hoping for the best. On this day, it just wasn't meant to be.

Bottom Line

There is no denying that Facebook has become an incredible phenomenon -- one that is proud to report almost 1 billion in active monthly users. Imagine (if you will) that is almost 15% of the world's population -- all interconnected with Facebook. The company provides a potential consumer base that is unmatched in the world today.

From that standpoint, its potential to offer immediate returns to businesses from the standpoint of targeted advertising is enormous. But when exactly is that going to happen -- or will it ever?

I continue to believe that investors are quick to confuse a "great idea" as in Facebook, with a "great business" -- two entirely separate terms. Facebook has to eventually answer the most important question of all, what is the value of social media?

At the time of publication, the author was long AAPL.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.