Here’s Why We Have Changed Facebook’s Price Target To $88

FB: Facebook logo
FB
Facebook

We have revised our price target for Facebook‘s (NASDAQ:FB) stock from $67.13 to $87.52, which reflects a change of around 30%. The current valuation reflects our revised estimates of Facebook’s three main businesses — advertising on the core Facebook platform ($190 billion), the monetization opportunity on Instagram and WhatsApp ($52 billion), and the Payments and other fees business line ($ 6 billion).

We believe advertising revenues on core Facebook platform will continue to grow rapidly over the coming years, fueled by several drivers including strong user base growth, an increase in ad pricing and the number of ad impressions, as well as higher mobile monetization. We believe the company’s ARPU (average revenue per user) could triple on the core platform in the long-run, bolstered by more targeted ads and additional monetization on Messenger and Search. Instagram and WhatsApp represent large sources of value since their user base is likely to more than double by the end of our forecast period. At the same time, we have conservatively forecasted ARPU on Instagram and WhatsApp to reach $9.00 and $5.00 by 2021.

Relevant Articles
  1. Will Johnson & Johnson Stock Rebound To Its Pre-Inflation Shock Highs of $185?
  2. Should You Pick Eli Lilly Stock After A 4x Rise In Three Years?
  3. Down 9% This Year, What’s Next For Lululemon’s Stock Past Q4 Results?
  4. Down 14% In The Last Trading Session, Where Is Adobe Stock Headed?
  5. Will Higher Federal Government Spending, Gen AI Drive Digital Security Stocks Like CrowdStrike Higher?
  6. Up 30% In A Year Is FedEx Stock A Better Pick Over UPS?

See our complete analysis for Facebook

Advertising On Core Facebook Still Has A Long Runway Ahead

We think the advertising revenues on core Facebook platform will expand from $11.5 billion in 2014 to over $45 billion in the long-run. We have forecasted the user base and ARPU figures separately to arrive at these estimates. We expect Facebook’s average monthly active user base to rise from 1.3 billion in 2014 to about 2.0 billion by the end of our forecast period, driven by solid growth across international geographies. In addition, we expect ARPU figures to almost triple in the long-run in U.S. and Canada, as well as the international markets.

These ARPU estimates are based on our assumption that ad engagement growth could somewhat outpace the growth in the user base, considering an increase in engagement levels across international markets as well as rise in ad inventory, with incremental support from potential monetization of Search and other mobile platforms such as Messenger. Moreover, ad pricing should continue to move northwards, driven by the delivery of better and more targeted ads (such as video ads), the trend towards mobile advertising, and increases in the number of marketers on the platform.

Instagram and WhatsApp Comprise Around 20% Of Facebook’s Valuation

There exists a large monetization potential for Instagram and WhatsApp. We believe Instagram’s monetization will skyrocket in the coming years on the back of its large user base and strong engagement levels. Over 300 million users spend an average of about 21 minutes daily on the app,  and we think the engagement could be higher than that on Twitter. Key brands such as Hollister, Michael Kors and Taco Bell have found advertising to be promising on Instagram, as the platform allows for creative delivery of ads. With Facebook ramping up advertising on Instagram across international markets and deploying new ad formats (such as video ads), we have modeled its ARPU to rise to around $9.00 in the long-run.

While Facebook seems to be in no hurry to monetize WhatsApp, we believe this service too has immense potential. We derive this view based on the fact that WeChat’s (a messaging app similar to WhatsApp) ARPU stood around $7.00 in 2014, according to estimates by Nomura. [1] Taking into account the 700 million plus user base on WhatsApp, and engagement levels of over 40 messages daily per person, we believe its ARPU can easily grow. We expect Facebook to start monetizing this messaging app meaningfully over the next two to three years, and have modeled its ARPU to increase to $5.00 by 2021. We think this could be a conservative estimate, as there could be multiple ways to monetize the app including in-app purchases, online payments, advertising, promoted accounts, social commerce, etc., apart from annual subscription fees.

Margins Could Come Down In The Short-Term

Facebook’s expenses are expected to increase significantly in the range of 55% to 70%  (in GAAP terms) in 2015 over 2014 levels. At the same time, top-line growth could slow down in the coming quarters with tougher year-over-year comparisons. We expect this trend to continue to over the next few years, and have forecasted Facebook’s adjusted EBITDA margins to decline from around 66% in 2014 to about 60% by 2017. Following that, we think the margins could stabilize and move upwards as the  revenue streams of Instagram, WhatsApp, Messenger become more prominent.

Our $87.5 price estimate for FB’s stock, represents around 10% upside to the current market price.

See More at Trefis | View Interactive Institutional Research (Powered by Trefis)

Get Trefis Technology

Notes:
  1. WeChat is nothing like WhatsApp—and that makes it even more valuable, Quartz, February 20, 2014 []