Here’s Why We Are Bullish On Facebook

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Facebook

With more than 1.44 billion monthly active users, Facebook (NASDAQ:FB) is positioned as the leading social network in the world. We have a $87.80 price estimate for the company’s stock, which represents near-10% premium to the market. The key factors underlying our bullishness include the solid potential for advertising business on the core platform, which could grow to more than $40 billion over the long-run, in our view. This will further be driven by the roll-out of better and more targeted ads, which could command higher pricing in the future. Moreover, the monetization of Instagram, WhatsApp and Messenger could add significant revenues in the coming years. While the company’s margins will be impacted by an increase in expenses over the near-term, we believe the company’s profitability could rise over the long-run with increasing maturity in the business model.

See our complete analysis for Facebook

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Facebook’s Core Advertising Business Could Grow To Over $45 billion By 2021

We expect advertising revenues on the core FB platform to rise from $11.5 billion in 2014 to over $45 billion by 2021. The key drivers to these estimates include:

  • We expect Facebook’s average monthly active users (MAU) to increase from 1.3 billion in 2014 to over 2 billion in the long-run. A large part of this growth is tied to international markets (outside the U.S. and Canada), where we expect average MAU to increase from 1.1 billion to over 1.7 billion during the same period.
  • The increasing adoption of smartphones, especially in emerging markets will further spur user growth on FB’s platform. According to eMarketer (a market research firm), the number of global smartphones users will surge from 1.64 billion in 2014 to 2.56 billion by 2018. [1] Further, Facebook’s Internet.org initiative which is helping facilitate Internet access across developing markets, will also help in driving usage growth on FB’s platform.
  • At the same time, we expect overall advertising average revenue per user (ARPU) to rise from $8.60 in 2014 to over $20.00 in the long- run. We expect an increase in both ad engagements as well as ad pricing to fuel this growth in ARPU.
  • We forecast average ad pricing on Facebook to expand at about 18% CAGR over our review period. This will be supported by secular trends towards digital and mobile advertising, coupled with Facebook’s measures to improve the quality and targetability of ads. While the number of active advertisers on Facebook surpassed 2 million recently, we expect this metric to further rise over our forecast horizon, considering there are more than 30 million small businesses presently on Facebook Pages. [2]
  • Moreover, we expect the total number of ads delivered to increase at 8% CAGR during 2016-2021, even though there could be a decrease in the short-term due to the shift towards mobile usage, where fewer ads are shown. This is because ad engagements will directly follow the growth in user base levels and engagement on the FB platform.
  • Finally, the monetization of Messenger and Search represents additional opportunities that we believe Facebook will exploit in the coming years to bolster its revenues.

Monetization From Instagram and WhatsApp Could Total Over $10 Billion In The Long-Run

In addition to core platform, we also expect Facebook to derive significant revenues from Instagram and WhatsApp over the coming years:

  • The increasing popularity of Instagram among the younger users is expected to drive its user base from over 300 million presently to over 700 million in the long-run.
  • At the same time, we expect Instagram’s revenues to start generating steam in the next 1-2 years, based on the uniqueness of the platform and the trends towards digital advertising.
  • With more than 800 million monthly active users, WhatsApp could be another source of long-term growth for Facebook. We expect the user base on this platform to continue to rise sharply over our forecast horizon, as WhatsApp is fast replacing the traditional SMS business throughout the world.
  • We have conservatively estimated the long-run ARPU on WhatsApp at $5.00, based on bench-marking with other similar apps and on the monetization potential of the platform.

Though Margins Will Decrease In The Near-Term, They Could Increase and Stabilize Over The Long-Run

Though Facebook’s EBITDA margins are forecast to decrease in the near-term owing to acceleration in expenses, they could increase to around 70% by the end of our forecast horizon. Efficiency improvements and maturity in the business model will limit growth in expenses over the log-run.

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Notes:
  1. 2 Billion Consumers Worldwide to Get Smart(phones) by 2016, eMarketer, December 11, 2014 []
  2. Facebook counts 2 million active advertisers, mostly small businesses, Reuters, February 24, 2015 []