Are Facebook Shares Back on Track? - Analyst Blog

Shares of Facebook Inc FB surged 7.3% ($4.22) to $62.41 on Apr 10, 2014, which was the stock's best performance since Jan 30, 2014. Although Facebook has increased 14.1% year-to-date, the share price actually declined 13.4% over the last month, primarily due to heavy sell-off of the momentum stocks.

Although we believe that the sell-off did not reflect any fundamental problems of Facebook, the recent surge will help to calm down investor nerves. The share prices are also expected to move higher on positive news that Federal Trade Commission FTC approved Facebook's controversial acquisition of WhatsApp.

Moreover, Facebook's monthly active user (MAUs) base crossed the 100 million mark in India, which is a significant achievement for the company. Additionally, the upcoming first quarter 2014 results are a key growth catalyst in our view.

The fact that Facebook's ad prices have been rising (10% sequentially in the current quarter) in the face of an outcry over “diminished organic reach” is expected to drive revenues in the quarter. Reportedly, brands are eager to pay more for advertising on Facebook due to its growing user base. Per Adobe ADBE, better targeting is also responsible for this rise in ad revenues.

We believe that FTC's approval of WhatsApp acquisition despite monopoly concerns in mobile text messaging will further pave way for Facebook to offer new services in the near future. As a part of the process, WhatsApp is expected to start offering free-voice call in the second quarter of this year.

WhatsApp's signficant user base in India is expected to boost Facebook's penetration going forward. Growing adoption of smartphone devices and continuing shift to the Internet are major growth catalysts.

Facebook's Internet.org initiative will also help it to expand presence in emerging countries like India and Brazil. As part of the initiative, Facebook is seeking partnership with wireless carriers who will roll out telecom networks and offer data services at affordable prices, particularly in these countries.

We believe Facebook's growing mobile user base (more than 1 billion), Instagram's increasing popularity (200 million users) and international expansions will boost the top line going forward. This will help it to fight intensifying competition from the likes of Google GOOG and Twitter TWTR going forward.

Currently, Facebook has a Zacks Rank #2 (Buy).