The Great Wall Street Facebook Panic is over. Now that it's finally showing material mobile ad revenue, Facebook is turning investor flames into friend requests; at least three investment banks have upgraded the social network to "buy" from "neutral" or "hold" and the stock is having its best day since its May debut, up 20 percent.
At the beginning of October, we laid out “the optimist’s case for buying and holding Facebook stock” and for a $141 billion valuation on the company, predicated on two key developments that came true in yesterday’s earnings report: acceleration in Facebook’s conventional display ad business, whose growth had been slowing, and a real mobile ad business. Facebook executives yesterday said mobile grew from 0 percent of ad revenue six months ago to 14 percent in the last quarter and that overall advertising revenue grew 36 percent, up from 28 percent in the year-ago period, reversing a lengthy deceleration.
Of course, there is still a very long way to go. Facebook is at just under $24 per share, up from a September low of just under $18 but well off from the IPO price of $38. Facebook’s market cap is well under half of our optimist’s scenario because the company has yet to fulfill two other prerequisites to reaching $141 billion: showing that social advertising will be disruptive and that Facebook can launch and successfully monetize possible new businesses like full-blown e-commerce or search.
Even the incremental growth in Facebook's conventional display-ad business should be considered fragile. Unlike Google’s big magical money engine AdWords, a raft of different advertising types and other revenue sources (like payments) share credit for Facebook’s $4.8 billion in anticipated 2012 revenue; all are relatively young and any of them could falter, or begin cannibalizing the others (already, mobile ads are taking money from desktop ads, Facebook’s CFO says).
What Facebook established yesterday is not that it's unstoppable but that it's at least not in the process of withering and dying like MySpace or of becoming an absolute nonentity in a disruptive new sector like Microsoft. In other words, investors should remember that, ridiculous IPO pricing aside, Facebook not only throws off upwards of a billion dollars a year in actual profits, but it also still knows how to move quickly. And that agility is worth something. Around $10 billion, it looks like.
