Wall St. Speaks Out: Facebook: The Growth Story Continues

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Facebook: Difficult to Restrain Optimism - Brian Wieser, Pivotal Research

BOTTOM LINE:Facebook reported another strong quarter with +41% revenue growth and strong profit expansion during 3Q15. With many levers of growth yet to be pulled, we continue to see many reasons to be increasingly optimistic as. For Facebook as for Google, size begets more size given the improving capacity the company has to capture a growing share of marketer "wallets." Our YE2016 price target is now $134 per share, up from $127 previously, and we continue to rate the stock Buy.

Although we're mindful about ad loads and the ever-present potential that consumers become disenchanted with Facebook for one reason or another, and we're also mindful that the company may add to its investments in areas not directly related to advertising (as with virtual reality initiatives, at least for now) it's difficult to restrain our optimism on the growth potential for the foreseeable future.

Supporting this view, we can point to ongoing user growth for the flagship product as well as for Instagram, Messenger and WhatsApp, and monetization that has barely begun for these additional properties. We can point to product improvements (such as including more video and search) that should help justify a growing share of digital spending on Facebook from existing advertisers over time. We can point to international revenue growth that is also yet to come in many large emerging markets such as India which should help to capitalize on spending from marketers in those countries. And we can point to the company's often lower profile focus on new ad products for its small business, developer and e-commerce segments of marketer customers who exist in all markets around the world. The latter three groups of advertisers collectively account (by our estimates) for around 70% of the company's revenue base

Post these results, looking more closely at the next quarter and those ahead, we are raising our forecasts for revenue growth in 2016 and beyond slightly, while continuing to anticipate modest margin erosion as the company continues to invest in new platforms. The flow-through effects of those changes lead us to raise our price target to $134 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 7.5% near-term discount rate and a 10.9% 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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