Facebook Ramps Up Revenues

We increase our NT estimates for Facebook as we preview its 3Q15 results.&#160; Concurrent with this report, we have made numerous changes to our product-by-product revenue forecast, including adding projections for Oculus VR, increased ramp in Premium Video and Instagram, offset by a push out for Audience Network contribution.&#160; Our price target increases from $110 to $115 as we roll forward our valuation parameters to 2016.Investment Case:&#160; We raise our estimates following checks suggesting a strong ramp in Premium Video, Instagram, and dynamic product ads (DPA) budget allocations on top of mid-single-digit sequential growth for App Install and Newsfeed.&#160; We also layer in ~$2.1b in Oculus revenue for 2016 but we assume that Facebook will follow a razor/razorblades model and sell the hardware at a loss to drive adoption.&#160; The greater takeaway is that Oculus, Instagram and Premium Video ads are but a few of the factors in a stacked product release slate that we have cited in our report ("Time to Rebuild Your Facebook Models&#8212;Raising to Outperform", April 21 2014).&#160; We hence maintain our Outperform rating based on our product-by-product forecast approach which leads us to believe: 1) FB will be able to drive revenue growth without a material lift in ad loads, 2) Street models are too conservative and underestimate the long-term monetization potential new products, 3) optionality and upward bias to estimates as they do not contemplate contributions from multiple other products.Valuation: Our price target is based on DCF with a 10.5% weighted average cost of capital and a 3% terminal growth rate which suggests $115 (vs prior $110).Document Link (20 Pages, 1078KB)The opinions and points of view expressed in this commentary are exclusively the views of the author and do not necessarily represent the views of MediaVillage.com / MyersBizNet, Inc. management or associated bloggers.

Facebook Ramps Up Revenues

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Stephen Ju

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