Wible's Weekly: Facebook: Initiating Coverage with a Buy; Mobile Drives But New Payments May Thrive - Janney/Media Entertainment

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We see FB benefiting from many of the obvious drivers like the massive secular move to mobile advertising, the scaling of recent investments (as soon as 2014), the consolidation of ad inventory around fewer publishers, and the growing demand for marketing segmentation and efficiency (especially in mobile). We believe the company also stands to benefit from: 1) the secular shift to the second screen during prime time TV hours, 2) the potential for a viable payment platform, 3) pricing leverage, and 4) a more seamless integration with traditional ad measurements and systems. This optimism is partly tempered by risk to payments revenue tied to the next gen game cycle and our disbelief that social ad spend will be at parity with time spent. On balance, we believe the opportunities far outweigh the risk, which leads us to launch coverage of FB with a Buy rating and $50 fair value.

Mobile – Mobile products improve accessibly, customization, and reach, which provides a massive opportunity for FB as its network provides unparalleled targeting and reach. We estimate global ad sales around mobile will grow to $21.8 billion by 2015. FB is positioned to capture a greater share than most others, and privacy limitations may ironically improve FB's ability to gain share.

Prime Time – Our real time sampling of millions of set top boxes in the US shows that consumers are failing to fast forward through commercials. This is a relatively new phenomenon that we attribute to smart device use during commercial breaks. Given that 40% of TV ad spend happens during key prime time hours, we believe there is a unique opportunity to gain share by working with TV networks.

Payments Catalyst - We believe the opportunity around payments is the biggest speculative opportunity that can rival that of advertising. FB is ideally positioned to break historical barriers to entry based on the 1 million ad buyers, 1.1 billion users, and broad FB Connect integration. Any product would seem to build upon two of the company's three goals of building an economy around the FB platform and enabling it to collect more information. We estimate a 10% share of global payment commerce would amount to $23.4 billion of revenue, which is so massive that FB may need to explore its potential.

Next Gen Risk - We believe a substantial portion of the unique payers on FB's game platform are hard core gamers that may incrementally allocate time and money towards the next gen systems launching this holiday. We estimate this demo may account for as much as 60% to 80% of the payer base and may be an even larger portion of revenue given the skewing of payments towards a small group of larger purchase payers. This massive risk is tempered by the fact that peak game activity is during work hours.

Facebook, Inc. [FB]
Price: $37.08
Rating: BUY

Tony Wible joined Janney Montgomery Scott in 2008 and is a Managing Director covering the Media and Entertainment sector after spending the previous 10 years at Citigroup InvestmentTony WibleResearch—most recently covering the Broadcasting and Entertainment Services industries.
Tony can be reached at twible@janney.com.

Janney Montgomery Scott LLC, is a U.S. broker-dealer registered with the U.S. Securities and Exchange Commission and a member of the New York Stock Exchange, the Financial Industry Regulatory Authority and the Securities Investor Protection Corp. Disclosures may be reviewed at Wible's Weekly.

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