Technology

Prediction: Facebook's new ad network will boost its stock back up to $40 and beyond set to grow

New ad network tech will boost the company.

Facebook’s Mark Zuckerberg (Photo: David Paul Morris/Bloomberg/Getty)

It was one of the most highly anticipated IPOs ever, but Facebook’s publicly traded coming-out party last May quickly crashed as its stock price plunged from $38 to as low as $17.73. The gleeful schadenfreude was palpable in headlines braying about the social network’s tumble. But that’s all soooo last year.

In 2013, on multiple fronts, Facebook will start to reap the benefits of groundwork begun in troubled 2012. That will include shifts in mobile, advertising and e-commerce that will serve up smiles to investors—and crow to the social network’s haters. Edward Jones analyst Josh Olson projects the company will see 27% year-over-year revenue growth in 2013, with about 30% more in ad revenue.

It shouldn’t be a surprise. The stock is already up by 54% since that lowly September day, and Facebook’s third-quarter revenues of $1.26 billion (up 32% year over year) beat Wall Street expectations of $1.23 billion. By early December, more than 60% of analysts covering FB gave the stock a Buy rating. The engine behind this growth was a 27% increase in ad revenues and 7% boost in ad pricing. When it comes to advertising, however, the best is yet to come.

Back in June, Facebook launched its Facebook Exchange (FBX), and already the ad-bidding network is showing incredible promise. It allows advertisers to target potential customers on the social network by buying impressions on an auction model, allowing for better pricing strategies and control. Wall Street’s been sniffing around for some concrete numbers on FBX, but so far Facebook has said it’s too early to officially report any real FBX results. That will soon change. Already some of the company’s partners are drooling over the results.

Ex-Googler Josh McFarland, now CEO of ad targeting company TellApart, told Wired in November, “Nine months ago, [Google’s] DoubleClick was just running away with the opportunities; they were just leaps and bounds ahead of everyone else. There was no other game in town, and then suddenly Facebook came on the scene and then literally in about three months became an exchange that is almost as powerful and almost as highly performing as the oldest, best ad exchange out there.”

Even more important is the impending arrival of Facebook’s external ad network, where it will use what it knows about our likes and dislikes to serve us ads on sites outside of the social network. This is significant because it builds on what has long been considered Facebook’s greatest strength—how much it knows about us—and discards its biggest weakness, which was that it could only use that intelligence within the social network.

“It means they can become a one-stop shop for any target an advertiser might have, which helps them capture more share,” says Pivotal Research Group analyst Brian Wieser.

Hunch founder and Andreesen Horowitz partner Chris Dixon recently wrote on his blog that a Facebook external ad network is inevitable. “Google proved this model with Adsense,” wrote Dixon. “Facebook’s traffic is so great now that an external ad network might increase their revenues by 2x or so.”

This ad strength also extends to mobile, an area that had many concerned last year. Facebook’s been able to increase its prices thanks to the success of embedding ads in users’ news feeds. Because of the space constraints in mobile, traditional banner and display ads aren’t as effective, so the seamless integration and high click rates of news feed ads—known in the industry as “native advertising”—are perfectly positioned to boost Facebook’s mobile business. Mobile already nabs more than 20% of the company’s ad revenues, according to one recent study, and the social network is pushing further onto phones with a new voice-calling feature in Canada.

The last major area in which we’ll see the social network continue to make inroads is in e-commerce. Leading Piper Jaffray analyst Gene Munster recently wrote that Facebook’s commerce-related features could hit $10 billion in revenue by 2015.

The hurricane of hyperbole leading up to Facebook’s IPO set it up to disappoint, but the company made moves to build a foundation for longer-term success. As desktop use, traditional ads and virtual payments on apps and games like those published by Zynga slow down, many analysts say the company’s mobile business, commerce features and new external ad network will more than make up for it. It’s a volatile stock, bouncing around at every scrap of news. “Very little of the conversation is about how much capital the company will be spending on data centres this year, or the composition of the typical advertiser spending money with the company. Most investors aren’t looking for that, but they should.”

Edward Jones’s Olson says Facebook will be a leader in technology for years to come. “But it’s not for the faint of heart, and it could be a bumpy ride to get there.”