FB Back in the Red: JMP Starts at Buy, $37 Target, Ad Potential Underestimated

Shares of Facebook (FB) are back in the red this afternoon, down 2 cents, at $25.85, having lost some steam from earlier in the session. The shares hit a new low today of $25.52. As you can from the chart below, the stock’s had some pretty wild swings this morning and into the afternoon.

This morning’s item on Bloomberg Television was a brief piece noting that the stock is the worst two-week performer among IPOs since the start of last year, down 27% since their May 18th debut through last Friday.

But the stock got another thumbs up this morning, with JMP Securities’s Mark Harding starting coverage of the shares at Market Outperform with a $37 price target.

Current assessments of the company focused on existing revenue sources “understate the company’s, as of yet, unarticulated potential opportunities (our best-case),” writes Harding.

His valuation is based on a multiple of 54 times his 68-cent-per-share estimate for profit next year, which represents a P/E-to-growth multiple of 1.5 times, which Harding thinks is appropriate given the company’s potential to “further monetize its user base.

Harding is modeling $4.99 billion in revenue this year and 52 cents a share in profit, which is slightly higher than the consensus $4.97 billion and 51 cents.

Harding writes that the pool of potential revenue just from advertising is underestimated:

Currently, FB�s advertising revenue represents about 11% of the roughly $30B worldwide display ad market and could reach 22% by 2015. Furthermore, we believe that there are plenty of other pools of ad spending including offline print (~$116B) and other (~$53B), part of which is likely to migrate from offline sources to online.

Harding also makes a point of noting that engagement with Facebook has been on the rise:

Using the U.S. as a proxy for engagement, from 1Q09 to 4Q11, MAUs increased to 65% from 51% of Internet users. Moreover, over the same period, daily active users (DAUs), as a percentage of MAUs, increased to 70% from 51%, indicating that not only did Facebook’s overall market penetration increase, but the level of daily engagement for new and existing users also increased. While the level of incremental daily usage in the U.S. is higher than in any other region, daily engagement in Europe increased 13 percentage points (to 62%) over the same period, Asia increased 9 percentage points (to 50%), and the Rest of World (ROW) increased 12 percentage points (to 48%). The level of daily engagement represents another data point for advertisers in determining the value of the platform/site.