Brokerage Needham & Co started coverage on Facebook Inc (FB.O) with a "buy" rating, a rare positive take on the shares of the social network after they lost nearly a fifth of their value since the company's stock started trading last Friday.
Facebook should be valued based on the revenue potential from total minutes spent on the website, Needham analysts said, setting a $40 price target on the stock.
Facebook shares were up 4 percent at $32.35 in early trade on the Nasdaq.
About 14 percent of the total time spent online across the world is on Facebook, suggesting that the company's revenue potential is $14 billion globally and $6 billion from the United States alone, the brokerage said.
Facebook posted $3.7 billion in revenue in 2011.
Facebook should have higher revenue than Google Inc (GOOG.O) over time because the number of users are about the same but the average time spent by a person on the website is three times more than on Google.com, the brokerage said.
Google's revenue was $37.91 billion in 2011.
"(Facebook's) global platform with long engagement times gives it a unique strategic position to generate revenue from global advertisers, payments, services, etc," said Laura Martin in a note to clients. "It also represents a meaningful barrier to entry."
Needham's Martin is rated four stars by Thomson Reuters StarMine for the accuracy of her earnings estimates on the companies under her coverage.
Google views Facebook as a threat and is moving aggressively to integrate social networking features across its products.
Facebook, whose margins are significantly higher than Google's in its first five years of existence, has about 900 million monthly users after eight years in existence compared with Google's 1 billion after 14 years, the brokerage said.
Facebook's operating margins are enormous and expanding, Needham said. "This powerful economic engine suggests profit growth will be faster than revenue growth."
S&P Capital IQ, however, started Facebook with a "sell" rating raising questions about the effectiveness of its advertising platform, margins on marketing messages on mobiles, and risks related to the use of sensitive personal details.
The brokerage, in a report dated May 22, set a $30 price target on the stock.
The company's initial public offering on Friday did not go as planned its sky-high valuation combined with trading glitches left the stock languishing below its offering price of $38.
(Reporting by Supantha Mukherjee in Bangalore; Editing by Joyjeet Das, Saumyadeb Chakrabarty)