Facebook Finds Friends on Wall Street as Stock Soars 20% on Mobile Gains

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The Nasdaq board in Times Square advertises the debut of Facebook stock in New York on May 18, 2012.

Over the last year, Facebook CEO Mark Zuckerberg has repeatedly emphasized his company’s social mission, “to make the world more open and connected.” It turns out that he’s interested in building a lucrative business as well. After Facebook’s surprisingly strong earning report, highlighted by impressive performance generating mobile revenue, the company’s shares skyrocketed by 20% on Wednesday, in the largest one-day gain since the company went public back in May.

Facebook’s strong third-quarter showing was rewarded with stock upgrades by several prominent Wall Street analysts. And although Facebook still faces fallout from its controversial IPO, this week’s performance has restored a measure of investor confidence in the company.

“Facebook’s wild first five months as a public company are now in the books, and the company has transformed itself over that time,” Wedbush Securities analyst Michael Pachter wrote to clients on Wednesday. “During the IPO road show and through its first earnings call three months ago, management gave few signs to shareholders that it cared much about them, or about generating meaningful profits. However, actions speak far louder than words, and since its July earnings call, management has consistently demonstrated that it is keenly interested in and aligned with its shareholders.”

(MOREHow Facebook Got Its Groove Back)

Analysts were especially pleased that mobile revenue accounted for 14% of Facebook’s ad sales, far exceeding what Wall Street had been expecting. Facebook’s mobile progress is absolutely critical, because the Internet industry is experiencing a fast-moving structural shift as users increasingly access the Web on smartphones and tablets.

Last quarter, Facebook made over $150 million from mobile advertising, up from zero dollars ($0) at the beginning of this year. On a conference call with Wall Street analysts, CEO Mark Zuckerberg said he wanted to “dispel the myth” that Facebook can’t make money in the mobile space — and he had the data to back it up. A staggering 600 million people now access Facebook using mobile devices.

“In the near-term, the Facebook story is going to revolve around its ability to replace declining desktop revenue with mobile advertising and other new products,” Macquarie analyst Ben Schachter wrote to clients Wednesday. He added that Facebook’s management has laid out a “compelling case that it is really ‘just getting started’ with monetization efforts.”

Several Wall Street firms raised their price targets on Facebook, according to Reuters, including Barclays, Jefferies and Macquarie. Influential Citigroup analyst Mark Mahaney upgraded the stock to “buy” from “neutral.” Facebook’s overall revenue increased 32% in the quarter to $1.26 billion, beating analyst expectations. “What investors have for the first time since the Facebook IPO is fundamentals acceleration with a reasonable valuation,” Mahaney wrote in a note to clients.

(MOREZuckerberg’s Remarks Give Facebook Shares a Boost — But Can He Deliver?)

Beyond its impressive mobile performance, Facebook is extremely well positioned to capitalize on the growing sophistication of targeted online advertising. The company’s scale is astronomical — over 1 billion monthly users — and people tend to spend much more time on Facebook than on other websites, simply because they’re interacting with their friends. All those interactions mean the potential for hyper-targeted social advertising.

“Users on Facebook leave a trail of data about their location and habits on a regular basis, providing the company with data about which products they buy, where they dine, their entertainment preferences, etc.” Pachter wrote. “We believe that Facebook has the potential to use this data to better match its users with advertisers that the users are interested in.”

Facebook ads can definitely be effective, but the company is still just scratching the surface with marketing campaigns. Zuckerberg has been wary about cluttering up the website’s design with annoying ads, but the company is slowly moving to place more ads in the News Feed, the central feature of user pages, according to COO Sheryl Sandberg.

Silicon Valley and Wall Street had — and have — high hopes for Facebook. It’s built an unprecedented global communications platform. For awhile it seemed as if Zuckerberg was more interested in his lofty social mission than in making money. But there’s nothing like a 47% stock plunge to focus the mind on the more commercial aspects of the business.