Why Wall St. has more faith in Facebook stock

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Wall Street is showing some renewed faith in Facebook.

Sanford Bernstein analyst Carlos Kirjner raised his rating on the social media company Monday to outperform from market perform, arguing that Facebook Inc.'s mobile newsfeed is finally in a position to bring in more revenue.

Mr. Kirjner boosted his target price for the stock to $33 (U.S.), saying analysts' consensus estimates for the company's growth are too conservative as the company expands its revenue streams over the next two years.

Mr. Kirjner's move caused the stock to jump more than 8 per cent and led at least one other analyst to raise his rating on Facebook's stock, breathing hope into one of Silicon Valley's strangest not-quite-success stories. The company's stock debuted in May with an initial public offering price of $38, but fell to lows of $18 by the end of August. With an initial market capitalization of $104-billion, Facebook's IPO was one of the largest ever, but its bumpy road has since triggered questions about how the social media giant can sustainably monetize its huge user base.

Facebook's target demographic can be safely called the entirety of the developed world. That sounds like a lot, but consider that its existing user base is already a billion active users per month; with 14 per cent of the world's population already logging in, Facebook's membership is bound to eventually hit a wall.

This raises the issue of how it plans to churn out revenues going forward. As it stands, the company's price-to-earnings ratio is close to 56, versus an average of 15 for the tech industry. If Facebook wants to perform as strongly as its peers, this means it'll have to beef up its earnings per share by 3.7 times. Since nearly quadrupling Facebook's membership would involve more than half the world's population, it's safe to say the best route would be to squeeze more the revenue out of each existing user.

Mr. Kirjner's renewed faith in Facebook suggests that, at least over the next 18 to 24 months, this is the direction in which Facebook is headed. He projects the company will bring in close to $7-billion in revenues in 2013 – 9 per cent higher than analysts' consensus forecast of $6.4-billion – and $8.7-billion in 2014, or 7 per cent greater than the consensus $8.1-billion.

The analyst believes that Facebook will make significant inroads in mobile advertising, suggesting that mobile will be "the main driver of growth" as the company ramps up the number of ad impressions each user sees per day on its smartphone apps. Facebook users, of course, won't be happy with these changes – they rarely are – but mobile ads are a necessary evil as the number of users who access Facebook on their smartphones swells. On Facebook's standard website, Mr. Kirjner said, the new Facebook Exchange targeted-ad system will also help generate ad revenue for the social-media giant. Using browser cookies, it tracks users' visits to third-party websites to deliver user-targeted ads that are bid on by advertisers in real time.

Income from these sources should be sustainable for the next 18 to 24 months, Mr. Kirjner said, giving Facebook options to explore further revenue streams. In the near-to-medium term, how Facebook manages revenue growth "will be the main driver of Facebook's stock performance."

Analyst Richard Greenfield of BTIG Research also raised his rating Monday, to neutral from sell. Observing Facebook for the past month, he wrote in a note, it is "incredibly clear that the company has decided to notably increase the ad load on its mobile application." He declined to raise his rating to buy, though, because of an uncompelling valuation combined with the negative impact ads would have on the user experience.

Victor Anthony of Topeka Capital Markets raised his price target on Facebook to $36 from $34 Monday after testing the company's new Gifts service, which allows users to send friends physical gifts when they celebrate a birthday or other milestone. "We came away convinced that Facebook has a huge opportunity ahead as an e-commerce platform," he said in a note.