Facebook shares jump 28% on soaring ad revenue

Facebook shares opened 28 per cent higher today after the company reported a huge jump in mobile advertising revenue, and analysts pointed to further growth from new advertising on Instagram and 15-second videos.

While still short of their IPO price of $38, the shares hit $34 - a price not seen since their second day of trading in May last year. At least 16 brokerages raised their price targets by as much as $9 per share - in sharp contrast to a string of earlier downgrades amid fears it would struggle to make money from mobile advertising.

Revenue from smartphones and tablets made up almost half of total advertising revenue in the second quarter. “FB’s massive audience should be irresistible to brand advertisers as the company preps to launch 15-second video ads, which could be Facebook’s next billion-dollar business,” analysts at Jefferies & Co wrote in a note.

Instagram, Facebook’s photo site with 130 million users, also looks ripe for the introduction of advertising and could be one of Facebook’s biggest revenue drivers, the brokerage said.

Analysts at Morgan Stanley expect video ads to boost ad revenue by over 10 percent. Facebook is widely expected to launch the service in the fourth quarter.

At least 11 brokerages, including Goldman Sachs, JP Morgan, RBC Capital Markets and Cantor Fitzgerald’s have a target price at or above Facebook’s IPO price of $38, a level the stock has never reached since its first day of trading in May last year.

The company has scrambled to address one of the main concerns weighing on the stock since its IPO, by developing mobile ads better suited to small smartphone screens that users increasingly use to access the service.

A year ago it had almost no mobile advertising. In the second quarter this made up 41 per cent of total advertising, jumping from 30 percent in the first quarter. Total revenue jumped by half from a year earlier.

“Facebook has discovered the formula to begin significantly extracting value from its 1.16 billion global users,” said JMP Securities analyst Ronald Josey. He raised his rating on the stock to “market outperform” from “market perform” and said the company was increasingly becoming a “must buy” for advertisers. Evercore Partners and BTIG Research also raised their ratings on the stock.

The quarter’s results shows Facebook’s massive market share gains from every internet company, including Google, Stifel Nicolaus analyst Jordan Rohan said.

As growing numbers of consumers take to their smartphones to access the Web, internet companies have struggled with the challenge of displaying ads on the smaller screens.

Last week, Google reported second-quarter results short of Wall Street’s estimates as weakening prices for its ads weighed on the bottom line.

While Susquehanna had expected Facebook’s superior mobile ads display platform to attract advertising dollars away from the competition, the brokerage said it was surprised by the strength of growth. “The Facebook versus Google debate will return to the investment community, after a year-long hiatus,” Stifel Nicolaus analyst Jordan Rohan said.

Facebook has seen its second quarter revenue soar to $1.813 billion - a 53 per cent increase on $1.184 billion in the same period last year.

The world’s biggest social network made $333 million in net income from April to June compared with a net loss of $157 million a year ago, according to the company’s latest financial results.

An average of 699 million people used the social media platform every day in June, it said, an increase of 27 per cent on the same time last year. The number of monthly users accessing Facebook on mobile devices — including smartphones and tablets — rose by 51 per cent year on year to 819 million in June.