Facebook: New $136 Price Target -- Brian Wieser, Pivotal Research

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BOTTOM LINE: Facebook reported another stellar quarter with +52% revenue growth and strong profit expansion during 4Q15. With many levers of growth yet to be pulled, we continue to see many reasons to remain highly optimistic in Facebook. For Facebook as for Google, size begets more size given the constantly improving capacity the company has to capture a growing share of marketer “wallets.” Our YE2016 price target is now $136 per share, up from $134 previously, and we continue to rate the stock Buy.

Facebook posted much stronger-than-expected results in 4Q15, beating estimates for revenue growth and margin expansion. The most notable element of the results was the pace of acceleration of advertising revenue growth even in the face of substantial foreign exchange headwinds.

Total revenue growth for 4Q15 was up year-over-year by +52% (or +60% on a constant currency basis), with advertising up by +57% (or +66% on a constant currency basis). EBITDA margins ex-stock-based compensation were 69.7%, which represents an increase vs. the year-ago period’s 68.9%. On an annual basis revenue growth was +44% (or +53% on a constant currency basis) with advertising up by +49% (or +59% in constant currency terms). Full year adjusted EBITDA margins were 66.7% vs. 67.8% in 2014. Considering that 2015 was expected to be a year of depressed margins due to accelerated investment inside of the business, these results are simply stellar for the company.

Framing these figures in context of global digital advertising, Facebook will have ended 2015 capturing approximately 12.5% of spending with digital media owners in countries outside of China, up from 9.7% in 2014. More impressively, Facebook will have captured approximately 30% of total global growth in digital spending during 2015 outside of China, based on our analysis of Magna Global estimates for the worldwide total. If considering digital spending outside of search, Facebook by itself captured approximately half of all spending growth. More remarkably, all of this has occurred before Facebook’s ad network products (let alone Instagram, Messenger, WhatsApp or Oculus) have really begun to take off.

Commentary around 2016’s macro-economic risks were appropriate, although we note as that in any downturn, marketers could very well choose to further concentrate spending on Facebook given the relative cost-efficiency of the platform. Foreign exchange headwind continuation as well as difficult comparables were also appropriate to reference, but equally were already considered in our model. On the (slightly) negative side, the mid-range of expense guidance was only slightly higher vs. our prior expectations (which were close to the low end of guidance previously) while capital expenditure guidance was essentially in-line if we consider a combined capex and M&A budget baked into our model. In total, the company expects to increase spending by 30-40% on a GAAP basis and by 45-55% on a non-GAAP basis. Guidance for capital expenditures were $4.0-$4.5bn in total. Placed in context of 2016 serving as another year of investment where we’ve seen 2015’s investment year produce such strong results, top-line growth enhancements will undoubtedly more than make up for incremental spending.

Post these results and looking more closely at the next year, we are raising our forecasts for revenue growth slightly, while continuing to incorporate modest margin erosion expectations as the company continues to invest in new platforms. The flow-through effects of those changes lead us to raise our price target to $136 on a YE2016 basis. We continue to rate Facebook Buy.

VALUATION. We value FB on a DCF basis, with a 7.0% long-term growth rate, a 8.1% near-term discount rate and a 10.8% long-term discount rate.

RISKS. Risks for web publishers relate to: 1) high degree of rivalry given absence of barriers to deter new competition from emerging 2) high and increasing capital needs and 3) government regulations/consumer pushback related to data management.


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