Facebook Report

After the 110% surge Facebook Inc. (Nasdaq: FB) had in 2013, many investors want to know if Facebook is still a smart buy.

Some analysts say its run has been spurred by two "questionable" earnings reports and that the social media giant remains a fad.

Others believe that the recent rally could be the start of something big for Facebook and its investors.

Here's why the latter could very well be true...

Advertising Overhaul Scores Big

Advertising expert and Money Morning E-commerce Director, Bret Holmes, believes Facebook's growth is due to some key advertising changes.

"Advertisers are lined up around the block to get their hands on Facebook," Holmes said. "It is yielding huge returns for all of us in the industry."

The rush to advertise with Facebook is due to a new format rolled out about eight months ago.

"Facebook has integrated in-stream ads to the user experience. Response rates are high and advertisers will always chase the least expensive ad with the best response. It works because it's new and cheap," said Holmes.

"Facebook now has the most advantageously competitive product on the market for advertisers - hands down."

Holmes said Facebook's recent earnings reflect this increasing ad spend.

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"Facebook is now in the inventory phase - and it has the biggest inventory in the world, making them a huge ad player," said Holmes. "Once all the inventory gets sold, Facebook enters a phase of competition, which means prices will go up. The only thing that could hurt them is if response rates go down - but they have innovated up to this point, and they probably still have some tricks in the bag."

What you're seeing now is major reaction to a new product - 'super consumption' - and a pricing increase will only benefit Facebook and can drive revenue skyward."

The ad model will help Facebook monetize its massive 1.15 billion users who increasingly access the site via mobile devices.

Mobile revenue accounted for 41% of ad revenue in Q2 of 2013, or roughly $656 million. That was up from 30% in Q1 of 2013, and 23% from Q4 of 2012.

According to research firm eMarketer, Facebook's share of global mobile Internet ad revenue hit 16.91% last year, a jump from just 5.35% in 2012.

In addition to the major advertising overhaul, Facebook has broken new ground in another money-making territory...

Sterne Agee analyst Arvind Bhatia reported that Facebook may have gained entry into China's strictly guarded Internet space.

Bhatia referred to an article in the South China Morning Post that said China is planning to lift its ban on Facebook, Twitter, and other blocked websites in Shanghai's new free-trade zone.

Since the 2009 deadly riots in the western province of Xinjiang, China's ruling Community Party has censored the Internet.

"While the lifting of the ban on Facebook in China is currently limited only to the Shanghai Free Trade Zone, it is an important first step," Bhatia wrote.

China is a lucrative, untapped market for Facebook. Home to 1.3 billion people, the Asian nation is the world's most populous country. It's also the fourth-largest global economy, has a gross domestic product growing at unparalleled rates, and is a key link in world commerce.

When to Buy Facebook

The recent results are promising, but it's too early to tell if Facebook has truly monetized its users. The real test is if it can deliver consistent growth over the long term.

Money Morning's Capital Waves Strategist and 30-year trading expert Shah Gilani, admits he was reluctant to pull the trigger when Facebook was in the $20s but believes it sill is in the early stages of what could be a multi-year rally.

"I was looking at it below $20, I bided my time and kept watching it go higher," he says. "I think it's got plenty of more room to go. I don't necessarily want to jump in right now, but I'd love to see it come down and look for a place to get in."

One strategy for investors interested in Facebook is to buy into Facebook at different levels--cost averaging.

This removes much of the dangerous guesswork investors fall pray to and eliminates the temptation to try to time the market or in this case a particular stock.

"I like Facebook, especially if it falls a bit," says Gilani. "I would recommend taking a 2% position around $55, 2.5% if it falls to $45 and another 2.5% at $35."

At just under the IPO price of $38, $35 might be the lowest we see Facebook go again, barring an all-out market crash.

Gilani isn't the only analyst turning bullish on Facebook.

UBS, Deutsche Bank, Argus, Needham, and Stifel Nicolaus all have "Buy" ratings, with price targets ranging from Stifel's $72 to Needham's $80 target.

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