Facebook: Target Raised To $33, Time To Buy

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Over the past three months, shares of social media giant Facebook (NASDAQ: FB) have soared 50% from a low of $17.55. During that span, not only has the company proven that its business model is less speculative than previously thought, but remarkably, Facebook has also been able to escape two lockup expirations unscathed.

Moving From Good Idea to Sound Business

There was never any question that Facebook was a good idea. That 15% of the world’s population (1 billion people) was using it removed all doubt. The issue has always been whether the company could effectively monetize the model. Not anymore.

Facebook’s recent performances were enough for analysts at Needham & Co. to raise their target on the stock from $25 to $33 per share. In a research note on Monday, Needham said:

"We are confident that each time Facebook discovers a successful new monetization format, Facebook can roll it out globally almost immediately and at a low incremental cost. It will be hard to catch this stock on the way up. In our view, buying it now would enable investors to participate in the potentially significant incremental returns on capital of this 'closed-system' global platform."

I have to agree with Needham. This statement supports Facebook’s Q3 performance, during which the company produced $1.09 billion in advertising revenue. But the impressive aspect of this was that 14% of that total (or $152.6 million) was generated from mobile.

This was certainly an encouraging sign for investors since Facebook’s biggest criticism has been its inability to monetize mobile traffic. During the quarter, it answered the call. Too, Facebook reported 12 cents per share on revenues of $1.26 billion – exceeding consensus estimates of $1.22 billion and 11 cents per share.

The company’s better than expected performance was helped by significant improvements in various segments of its business, many of which continue to grow by double-digit averages, including payment revenue, which soared 13% to $176 million. But will it last?

Can Google Steal Facebook’s Momentum?

Unlike the hype-filled IPO that prematurely ranked Facebook on the levels of Google (NASDAQ: GOOG), Apple and Amazon, Facebook is now moving towards a more sustainable growth business -- a changeover that includes becoming less reliant on desktops to a mobile-friendly platform. But will advertisers respond?

Google is still nonetheless the standard when it comes to advertising. However, there is new evidence that the tide is starting to shift – albeit slightly. In May, a report was released by Wordstream that measured the “click through rate” (or CTR) between the two rivals, during which the report concluded that Facebook had less reach than Google and therefore its ads were less effective.

If you recall, this was the same period during which General Motors (NYSE: GM) ended its advertising relationship with the Facebook – although GM has since returned. The report revealed that advertisers were paying more per click on Facebook than they were on Google.

However, in the most recent report, it showed a reversal as Facebook’s CTR has increased, which means that advertisers now pay a lower rate per click. On a similar note, it seems that Facebook’s sponsored stories have helped the company gain more overall traction with advertisers as evident by the 32% year-over-year growth in ad revenue.

Whether or not Facebook can eventually take down the goliath in Google remains to be seen. For now, the good news is that Apple (NASDAQ: AAPL) plans to help. Facebook has a good friend in high places and Google serves as one common enemy. Apple’s new iPhone 5 and that its IOS6 seamlessly integrates Facebook is certainly a huge advantage. After all, if Facebook is ever going to dominate mobile, can it find a better pivot point than being adopted by the iPhone? Not hardly.

Bottom Line

I have always liked Facebook. Although the company is certainly not out of the woods just yet, I was impressed that it was able to improve ad revenue sequentially by 7%. This means that the company’s new mobile strategy, which includes addressing an important key growth area is working. I think the stock is attractive at current levels and although Needham placed a $33 price target on the shares, I will maintain my $40 target over the next 12 months on the basis of mobile growth.

rsaintvilus is long AAPL and has no positions in the other stocks mentioned above. The Motley Fool owns shares of Apple, Facebook, and Google and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Apple, Facebook, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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