Has Facebook Finally Figured Itself Out?

Facebook’s (NASDAQ:FB) stock chart over the last year looks like the silhouette of the the world’s most amazing roller coaster. With an unproven revenue model, the company’s stock price has been highly sensitive to investor sentiment and as a result analyst opinion has been a major driving factor of buying and selling activity. Monday was a good example of this, as Facebook shares shot up as much as 8.1 percent in morning trading after upgrades from analysts at BTIG and Bernstein Research.

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According to Forbes, Bernstein analyst Carlos Kirjner sees 2013 revenue climbing up to $6.976 billion, 9 percent higher than current expectations. “Facebook probably can increase the number of ad impressions per user per day with limited chance of seeing material deterioration in user experience,” he wrote, moving his rating from “Market Perform” to “Outperform.”

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New monetization schemes such as news feed advertisements, Facebook exchange, and an expanded gifting mechanism would spearhead this revenue increase.

Richard Greenfield at BTIG moved his rating from “Sell” to “Neutral,” although he still thinks the new monetization schemes risk harming the user experience. He sees fourth-quarter ad revenue up 42 percent, leading a 37-percent increase in total revenue.

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Facebook’s success is predicated on developing a stable advertising platform and effectively monetizing mobile. The company’s stock sees gains nearly every time news indicates that it has made progress with its ad-platform, and retreats whenever its newest ad strategy looks clumsy.

Now that a clear revenue model is building around competent and effective advertising, and assuming that revenue will drive stock performance, Facebook investors could see substantial upside in the coming year. Data from eMarketer indicate that the overall U.S. display ad market will grow 21.5 percent to $14.98 billion in 2012, and Facebook will claim a growing 14.4 percent of that market.

Facebook is gaining in the display ad space against Yahoo (NASDAQ:YHOO), formerly the display ad champion, but still losing out to current industry leader Google (NASDAQ:GOOG).

How Will This Affect Facebook’s Stock?

Investors clearly reacted favorably to the analyst upgrades. Backed by strong advertising revenue, Facebook’s long-term prospects are looking increasingly favorable. Shares are up 17 percent over the last month on a string of positive news from monetization initiatives.

Facebook is slowly demonstrating that it can build a successful business off of its over 1 billion user base. The company’s stock is bound to follow increasing advertising revenue in seeing strong growth in the coming year.

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