Facebook Shares Nab Biggest Gain Since IPO on Earnings, Analyst Upgrades - Wall Street Journal

By MATT JARZEMSKY

Facebook Inc. on Wednesday posted its biggest daily stock gain since its initial public offering in May, a day after reporting strong revenue and progress on making money from mobile ads.

The social network's shares rose 19% to $23.23 on the Nasdaq Stock Market, its highest closing price in five weeks. Through Tuesday's close, the shares had fallen 47% from their IPO price of $38.

The results came amid intense investor scrutiny of Facebook's growth, and suggested the company is making headway on the selling of ads on mobile devices, an area seen as a driver of its future success.

"They're moving in the right direction, and it seems to be that they're picking up speed," said Kevin Landis, chief investment officer of Firsthand Capital Management. The San Jose, Calif., firm oversees about $300 million and bought 600,000 Facebook shares before the IPO.

"They're starting to get more revenue on each mobile user, and the mobile users are spending more time on Facebook," Mr. Landis said.

Late Tuesday, the Menlo Park, Calif., company reported an increase in third-quarter revenue that topped analysts' expectations, fueled by sales of advertising on its mobile application. Sales of mobile ads accounted for 14% of the company's ad revenue.

The social network also swung to a loss for the quarter. Excluding items such as stock-based compensation, the company's profit was nearly flat at 12 cents a share.

The results suggest Facebook "can effectively grow revenues while usage transitions to mobile platforms from [personal computers]," Bank of America analysts wrote in a note to clients early Wednesday.

The analysts boosted their rating on the shares to a "buy" recommendation from an earlier "neutral" position. Citigroup and Stifel Nicolaus analysts similarly boosted their ratings on the stock to "buy," from earlier ratings of "neutral" and "hold," respectively.

The stock's gain Wednesday was the fourth-biggest among stocks on the Nasdaq Composite Index. It saw Facebook's shares trade at about 45 times the company's expected earnings this year, the highest price-to-earnings ratio in three weeks, according to FactSet.

Trading activity surged, with close to five times the average daily volume in the stock changing hands, according to FactSet.

Facebook's shares have seen big swings since their debut. The stock briefly jumped as high as $45 the day of its IPO, but closed at $38.23 that day, just above the offer price. The shares tumbled after Facebook's disappointing second-quarter earnings report and, on Sept. 4, closed at an all-time low of $17.73.

Wednesday's rally comes ahead of more potential hurdles for the stock. Agreements prohibiting the sale of Facebook shares by early investors continue to expire. In three weeks, another such lockup agreement expiration could add to the supply of available stock, weighing on Facebook's share price.

On Facebook's earnings call Tuesday, Chief Executive Mark Zuckerberg defended the potential for the company's mobile business. "I think our opportunity on mobile is the most misunderstood aspect of Facebook today," he said.

Mr. Zuckerberg added that he expects the company will ultimately make more money from user activity on mobile, based on time spent.

The company only began to roll out ads to its 604 million mobile users in March, through a program called "sponsored posts," which insert paid marketer messages into the home screen of its mobile apps.

Since the summer, Facebook has increased its inventory of those ads, and introduced new products, such as an app ad service. Last month, Facebook also began testing a version of a mobile ad network, which places Facebook ads inside other apps.

â€"Evelyn M. Rusli contributed to this article.

Write to Matt Jarzemsky at matthew.jarzemsky@dowjones.com

Corrections & Amplifications
Sales of mobile ads accounted for 14% of Facebook Inc.'s advertising revenue. An earlier version of this article incorrectly stated that sales of mobile ads accounted for 14% of the company's total revenue.

A version of this article appeared October 25, 2012, on page B7 in the U.S. edition of The Wall Street Journal, with the headline: Facebook's Battered Shares Rally 19%.