How Facebook Has 65% Upside

According to the social networking giant's S-1, Facebook has 488 million users accessing the site through their mobile devices, but has not yet been able to generate "meaningful" revenue in this area, despite being the most downloaded app on Android and iPhone in January. "We see mobile monetization as a significant long-term growth opportunity for Facebook, but with some initial challenges," Bhatia wrote.

Then there's Facebook's potential entry into China, where Renren(RENN) is the dominant social network.

Bhatia notes that China accounts for almost a quarter of the world's Internet users, and if Facebook were able to access the market, it could add $400 million to $600 million in incremental revenue.

The virtual goods market, led by growth in purchases from companies such as Zynga(ZNGA) , lets Facebook diversify its revenue from strictly advertising. Facebook takes a 30% cut from the goods purchased on its platform, similar to what Google and Apple(AAPL) do with their app stores. This market is expected to reach $14 billion by 2016.

There are several caveats Facebook investors should be aware of, however, including slowing growth, sequential decline in revenue, and potential challenges in China.

Bhatia notes that carving out a firm presence in China is difficult, as Google has shown. Compliance with Chinese regulatory authorities, for example, is difficult and addressing Chinese culture poses challenges, particularly in the face of incumbents such as Renren.

Facebook has said that it wants to touch each of the world's 2 billion Internet users. It already has over 900 million users, so there's potential for 1.1 billion more, or just over half of the world. "While we expect Facebook to benefit from an increasing base of internet users and to be able to achieve higher penetration rates of internet users, the hyper growth of past years is unlikely to be matched simply due to the law of large numbers," Bhatia said in his note.

Then there are the concerns about slowing revenue growth. Facebook said that revenue grew 45% year-over-year in its first-quarter, but that was down from 55% in the fourth quarter 2011 and 104% in third-quarter 2011. This could be a seasonal decline, but it's something investors will need to be aware of, especially given the hype surrounding Facebook.

Facebook is starting its roadshow for its IPO and is expected to go public late next week, either May 17 or May 18.