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Facebook Enters Sophomore Stock Year with Fewer Skeptics

NEW YORK ( TheStreet) -- The obsession of a generation of college freshman, Facebook (FB - Get Report) enters its sophomore year as a public company with a rare pessimist converting into an optimist on the social network's stock.

On Monday BMO Capital Markets analyst Daniel Salmon upgraded Facebook to "Outperform" from a previous rating of "Underperform" - the Wall Street equivalent of sell - on expectations the company will see an acceleration of ad revenue and continued growth in its newfound focus on mobile ad dollars as users increasingly access the social network on Apple (AAPL - Get Report), Microsoft (MSFT - Get Report) and Google (GOOG)-powered smartphone devices.

Notably, Salmon is increasing Facebook's 2013 earnings expectations by just 20%, but sees a more than doubling of Facebook's shares from previous forecasts on a surge in the company's valuation multiples.

"We believe Facebook is experiencing a reacceleration of ad spending from large brands that are returning for mobile "reach & frequency" and more video ads," writes Salmon, in the Monday upgrade, which more than doubles Facebook's price target to $32 a share from a previous estimate of $15.

"We also believe direct response (DR) advertisers are now armed with a proper set of ad buying tools; while Facebook Exchange receives most of the attention, Custom Audiences is what we hear the best feedback about," adds Salmon.

After reporting better than expected earnings in October that signaled progress on Facebook's efforts to generate mobile ad revenue -- a key uncertainty in the wake of the network's May 18 initial public offering -- it appears chief executive Mark Zuckerberg & Co. are increasingly winning over skeptics on the company's long-term earnings potential.

Previous to Salmon of BMO's Monday upgrade, only three of the 40 analyst covering Facebook held out a 'Sell' rating for the company's shares, according to analyst estimates compiled by Bloomberg.

In more than doubling his price target of Facebook's shares, Salmon adds that Facebook's recent monetization efforts such as sponsored stories, gifts, in addition to conversations with advertising agencies are driving the change of heart. Still, Salmon cites lingering risks to the upgrade, which have a been a key reason for Facebook's poor post-IPO performance.

"Top risks include: 1) investor expectations for paid search and ad network businesses remain too high; 2) potential engagement attrition due to over-commercialization, and 3) a "portfolio of social networks" strategy that is still in its early stages," writes Salmon.

Salmon estimates Facebook's fourth quarter revenue run ahead of Wall Street expectations of $1.7 billion.

The analyst now estimates Facebook will see 30% revenue growth in 2013 and adjusted earnings per share of 72 cents. To get to a $32 a share price target, Salmon also is increasing Facebook's price-to-adjusted earnings multiple to 45 times forecast 2013 earnings, a near doubling of the multiple from 25 times earnings previously.

"We believe rising estimates will pull up the multiple and 45x still comfortably falls between GOOG's 15x multiple and LNKD's 100x," writes Salmon.

Facebook shares rose 2% in Monday afternoon trading to $26.43, an over 50% increase share price lows hit in early September. Year-to-date Facebook's shares are off over 30%, even after a late year stock rebound on an improving earnings outlook.

For more on Facebook, see why the company's valuation shouldn't be a trick question on Wall Street. Also see why a venture capital investor suggests thinking long term on Facebook after its weak post-IPO performance.

-- Written by Antoine Gara in New York

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