Facebook Flap Overblown -- Massive Growth Lies Ahead

NEW YORK (TheStreet) -- Facebook's (FB) IPO has been nothing short of a disaster. A falling share price and accusations of improper disclosures have raised serious questions, but one analyst thinks Facebook will be all right in the end.

Needham analyst Laura Martin initiated coverage on the social networking giant with a $40 price target and rates the shares "buy," calling the company "an option on the world."

Much has been made of Facebook's scale. It has over 900 million users, more than half of whom access the site through mobile devices. More than 500 million are daily users. In its most recent quarter, the company generated $1.06 billion in revenue.

Martin says Facebook's revenue-generating ability is only just starting. The company deserves a premium to Google ( GOOG) because "the risk an investor takes in buying FB is lower than Google's at its IPO date."

The average time spent on Facebook is 14 minutes per share, nearly three times that of Google.com, Martin wrote in her research report. "In terms of value, investors are buying FB at half the valuation of Google, but getting three times the minutes spent. In fact, the single Facebook.com site accounted for 14.6% of all time spent online, while all Google sites (including YouTube) were second at 10.8%, and all Yahoo! ( YHOO) sites were third at 8.6%," Martin wrote in her research report.

As Facebook works on producing revenue outside of traditional advertising, payments will play a major factor. Revenue from "payments and other fees" was $186 million in the first quarter, doubling from a year earlier. As such, Martin is optimistic about this revenue segment over time.

Developers should be able to generate value from Facebook's global reach, as Zynga ( ZNGA) has, through so-called revenue credits. Martin even says PayPal, owned by eBay ( EBAY), and credit card companies could lose revenue to Facebook credits over time.

Martin also notes that Facebook's margins are likely to grow exceptionally fast, as it is a fixed-cost business. This will allow earnings to rise faster than revenue, which may lead to upside in the stock price. As advertisers continue to move advertising online and the company's e-commerce initiatives take off, this is likely to improve Facebook's revenue over time.

There are several caveats to investing in Facebook, Martin says. The major risks to her price target include fatigue, privacy concerns, advertising seasonality, mobile, and its relationship with Zynga and others that may impede Facebook's meteoric rise.

Zynga is one of the largest risks to Facebook, accounting for 12% of revenue. If the relationship were to deteriorate, that is a significant portion of revenue Facebook would have to make up elsewhere, or risk seeing revenue growth slow, or even contract. Zynga's relationship expires with Facebook in May 2015.

Facebook has mentioned mobile as an impediment to growth, having listed it twice in the risk section of its S-1 regulatory document. Despite that, the mobile advertising market is expected to reach $2.9 billion by 2014, up from $1.6 billion in 2012, according to BIA/Kelsey. Facebook has addressed this issue, most notably buying Instagram for $1 billion.

Interested in more on Facebook? See TheStreet Ratings' report card for this stock.

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-- Written by Chris Ciaccia in New York

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