Updated from Nov. 24

BEIJING -- Shares of Focus Media ( FMCN) are flirting with historic highs, up 14% since the Chinese advertiser beat third-quarter earnings expectations last Tuesday.

Based on Friday's close of $68.16, Focus Media has more than doubled in value so far this year, boasting a 102% rise.

The Shanghai-based firm's strategy: push deeper into existing markets in China's richest big cities and accelerate the move into less affluent, fast-developing cities, all the while continuing to scoop up smaller ad firms.

In a move CEO Jason Jiang said would "strengthen our focus" on expansion in China's second tier of cities in 2007, the company on Monday named a new chief operating officer, former head of marketing Diana Congrong Chen.

The company is a pure play on the rapid growth of Chinese advertising , a sector much cherished by investors of late. Focus Media makes money by running ads over a network of company-built displays in offices and supermarkets. Through a handful of acquisitions, it has also branched into new markets, advertising on street-side digital billboards and cell phones.

So what are the chances Focus shares can stay aloft? Keep in mind that the stock reached similar levels last May, then suffered a summer retreat before eventually rebounding to current heights. This stock is no stranger to volatility.

Growing bullishness on the China ad market could help Focus Media sustain its recent gains. But in the longer term, there are some big caveats to keep in mind.

First, a quick review of the bullish case: The ad firm's growth has been impressive, as reflected in its third-quarter results. Sequential revenue jumped 21% to $51.1 million, and year-on-year sales jumped a whopping 214%, boosted by half a dozen acquisitions over the past 12 months.

"The story for this company focuses on the profitability and leverage inherent in its fixed-cost business model," writes Citigroup analyst Jason Brueschke in a post-earnings note. Brueschke, who has a buy rating on the shares, lifted his earnings estimates for 2006 by a healthy 9% in reaction to the quarter. (Citigroup has done investment banking for Focus Media within the past year.)

It hardly hurts that 2007 is shaping up to be a banner year for ad firms in China, helped along by the lead-up for the 2008 Beijing Olympics. Chief financial officer Daniel Wu said on the conference call that Focus Media is "well-positioned to participate in this strong growth in 2007."

The firm's strategy looks like a recipe for fat sales growth. But some argue Focus Media's prospects are over-hyped.

"It's sort of an investor darling right now," says Shaun Rein, managing director of the Shanghai-based China Market Research Group. Yet he questions the effectiveness of Focus Media's ads in office buildings, which are broadcast on LCD screens in lobbies and near elevators to be viewed by waiting patrons.

"Consumers might look at the screens, but they don't actually retain anything," Rein contends. "There's too much ambient noise. And a commercial may be 30 seconds long, but people get pushed into the elevator after 10 seconds so they don't really get what the commercial's about."

Though ads are supposed to be targeting well-heeled businesspeople, Rein recently spotted Focus Media screens running ads on the 20-yuan ($2.53) airport minibus in the southern Chinese city of Shenzhen. "They say they're targeting rich people," he says. "But the bus mostly carries young people, people who are at the lower end of the income scale or who just want to save money." Rein has also seen Focus Media screens in plenty of less-than-prime office buildings.

Another potential problem: Rein believes the cost of maintaining the company's liquid crystal display (LCD) screens will be higher than expected, because of China's ambient pollution as well as regular wear and tear.

Even those who like the stock acknowledge the need for caution, particularly from a competitive standpoint. There's no shortage of rival firms now trying to edge in on Focus Media's core business of running ads in office buildings, which offers tempting 70%-plus profit margins.

Two competitors -- Beijing All Media and Culture Group, and Shanghai Media Group -- are both developing a substantial presence in office TV advertising in their respective cities. Such local media outfits "may have several advantages, including a broader range of media content and a closer relationship with local government," writes Morgan Stanley analyst Richard Ji. (Morgan Stanley has done investment-banking for Focus Media within the past year.)

Ji, who has an overweight rating on the shares, points out that as Focus Media tries to sell more display ads in supermarkets, airports and trains, it will increasingly run up against ad firms that specifically focus on these markets (and can claim they're better at targeting the right customers).

Ji still likes the stock, citing Focus Media's "nationwide scale, brand recognition, and superior operation." But he says it will need to keep tabs on rivals to maintain its market lead.

Given its focus on the still-emerging and unpredictable ad display market, Focus Media looks likely to remain one of the more controversial of Chinese stocks. But for the moment, bullish investors seem inclined to disregard longer-term potential risks and opt for the teacup-half-full approach.