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Why the Facebook Stock Price Has Doubled in Two Months – Money Morning

This is a syndicated repost courtesy of Money Morning. To view original, click here. Reposted with permission.

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Facebook Inc
NASDAQ: FB

Sep 25 02:40 PM
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Price: 49.17 | Ch: 0.72 (1.5%)

After an ugly 15 months of trading, the Facebook stock price (Nasdaq: FB) has not only passed its $38 initial public offering (IPO) price, but it has more than doubled over the last two months and is up an astounding 85% year to date.

Shares of the social networking giant have done a stark about-face since hitting a low of $17.55 in September 2012.

Some 135,723,000 shares changed hands Tuesday, making FB the day’s most actively traded stock. Shares finished the day at $48.45, up 2.67%

Facebook stock was trading above $49 a share Wednesday.

Why is Facebook stock up after months of lingering nearly 50% below its IPO price?

Turns out Facebook found the key to unlocking advertising profits…

Citigroup (NYSE: C) analyst Mark May wrote this week that he had checked with advertisers and found that positive advertising trends that developed for Facebook in Q2 were still strong in Q3.

May wrote that several advertisers “are experiencing >15% seq. growth in spend,” that recent data suggested growth in mobile app downloads, and that Facebook “had significant room to increase fill rates coming out of 2Q13.”

He also upped his price target to $55 from $32, and upped his rating to “Buy” from “Neutral.”

We asked our in-house advertising expert, Money Morning E-commerce Director Bret Holmes, if he saw the same growth trends in Facebook’s ad presence.

“Advertisers are lined up around the block to get their hands on Facebook,” Holmes told us Wednesday. “It is yielding huge returns for all of us in the industry.”

Here’s what Facebook is finally doing right…

How an Ad Overhaul Triggered a Facebook Stock Surge

Holmes said the rush to advertise with Facebook is due to a new format rolled out about eight months ago.

“Facebook has integrated in-stream ads to the user experience. Response rates are high and advertisers will always chase the least expensive ad with the best response. It works because it’s new and cheap,” said Holmes.

“Facebook now has the most advantageously competitive product on the market for advertisers – hands down.”

Holmes said Facebook’s Q3 earnings (due out Oct. 21) should reflect this increasing ad spend.

“Facebook is now in the inventory phase – and it has the biggest inventory in the world, making them a huge ad player,” said Holmes. “Once all the inventory gets sold, Facebook enters a phase of competition, which means prices will go up. The only thing that could hurt them is if response rates go down – but they have innovated up to this point, and they probably still have some tricks in the bag.”

“What you’re seeing now is major reaction to a new product – ‘super consumption’ – and a pricing increase will only benefit Facebook and can drive revenue skyward.”

The ad model will help FB monetize its massive 1.15 billion users who increasingly access the site via mobile devices.

Mobile revenue accounted for 41% of ad revenue in Q2 of 2013, or roughly $656 million. That was up from 30% in Q1 of 2013, and 23% from Q4 of 2012.

According to research firm eMarketer, Facebook’s share of global mobile Internet ad revenue will reach 15.8% this year, a jump from just 5.35% in 2012.

In addition to the major advertising overhaul, Facebook has broken new ground in another money-making territory…

Sterne Agee analyst Arvind Bhatia reported Tuesday that Facebook may have gained entry into China’s strictly guarded Internet space. Bhatia referred to an article in the South China Morning Post that said China is planning to lift its ban on Facebook, Twitter, and other blocked websites in Shanghai’s new free-trade zone. Since the 2009 deadly riots in the western province of Xinjiang, China’s ruling Community Party has censored the Internet.

“While the lifting of the ban on Facebook in China is currently limited only to the Shanghai Free Trade Zone, it is an important first step,” Bhatia wrote.

China is a lucrative, untapped market for Facebook. Home to 1.3 billion people, the Asian nation is the world’s most populous country. It’s also the fourth-largest global economy, has a gross domestic product growing at unparalleled rates, and is a key link in world commerce.

Related: Don’t Feel Bad If You Miss Out on the Twitter Stock IPO

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