Why We Revised Our Price Estimate For Facebook’s Stock To $165

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Facebook‘s (NASDAQ:FB) stock is up about 18% year-to-date (YTD) and 22% in the last twelve months, driven by strong revenue growth in the first half of 2017, slightly offset by the company’s expectations that revenue growth will slow down going forward. In terms of financial performance and engagement metrics, the company significantly outperformed expectations in the first half of 2017. Facebook registered 47% growth in revenue to about $17.4 billion in the first half of 2017 over the same period last year, driven by solid growth in advertising. Operating income grew by close to 63% to about $7.7 billion, and the company’s operating margin improved from 40% in the first half of 2016 to over 44% in the first half of 2017. This helped Facebook post 71% year-over-year (y-o-y) earnings per share growth in the period to $2.40 a share.

Furthermore, its average revenue per user has also improved especially in the U.S. The company is also witnessing sustained growth in its user base due to excellent adoption among mobile users in developing countries. As a result of this performance, we have revised our price estimate for Facebook’s stock upwards by 15% to $165. Notable changes to our drivers are as follows:

  • Monthly Active Users: There was 17% y-o-y growth in Facebook’s monthly active users (MAUs) to over 2 billion at the end of June 2017. This translates into an average of 1.93 billion users accessing Facebook at least once every month for the first half of this year. To put this in perspective, this means that over 26% of the world’s population logs in to Facebook on a monthly basis. This ratio varies from about 63% in the U.S. and Canada to 13% in the Asia-Pacific region. Facebook’s monthly active user base remained strong across all platforms, including Instagram, WhatsApp and Messenger. At the end of March 2017, the number of MAUs on Instagram, WhatsApp and Messenger were 600+ million, 1.2+ billion and 1.5+ billion, respectively. Based on this trend, we have increased our forecast for average Facebook users in the U.S. and Canada to 261 million by 2024. Furthermore, we also expect average international user base to grow to over 2.2 billion by 2024. Additionally, we anticipate that MAUs on Instagram, WhatsApp and Messenger will grow to 1+ billion, 1.7+ billion and 2+ billion, respectively, by 2024. Cumulatively, this revision in MAUs across platforms has added around $10 to our stock price estimate.
  • Average Revenue Per User: The average revenue per user (ARPU) across Facebook’s platform has improved considerably in the first half of 2017. Worldwide ARPU has improved by 23% from $3.82 in Q2 2016 to over $4.70 in 2017. Marked improvement in ARPU from the U.S. and Canada has been the primary driver of the improvement. The ARPU for the U.S. and Canada improved by 35% in Q2 2017 to around $19.40. We expect that this metric will increase to $121 (full year) by 2024. Additionally, we forecast ARPU for international markets to grow to over $19 by 2024. This upward ARPU revision has led to an $11 upside to our earlier stock price estimate of $144.

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