Facebook Ramps Up Revenues

We increase our NT estimates for Facebook as we preview its 3Q15 results.  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.  Our price target increases from $110 to $115 as we roll forward our valuation parameters to 2016.

Investment Case:  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.  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.  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—Raising to Outperform", April 21 2014).  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).

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