Facebook's (FB) Price Target Raised to $160 at Morgan Stanley; Growing Scale and Engagement Are More Important Than Ad Load Growth, Says Analyst
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(Updated - September 7, 2016 9:41 AM EDT)
Morgan Stanley maintained an Overweight rating on Facebook (NASDAQ: FB) and raised its price target to $160.00 (from $150.00). Analyst Brian Nowak said the bank's analysis of Facebook's user, engagement, ad pricing, and ad load trends show suggests that it can deliver 6% and 10% 2017 revenue and EPS upside compared to consensus.
Some investor are concerns that a second half ad load growth slowdown will lead to material revenue deceleration and smaller beats. This has driven underperformance, with Facebook now trading almost 40% below its median relative P/E multiple and within 3% of its trough. Nowak said he agrees ad load growth will slow, but he sees the company's large and growing scale and engagement are even more important.
"Ad load (measured as ads/DAU/hour) has been a material growth driver – we estimate ad load will drive ~32% of FB's '16 ad revenue growth. And we're modeling this to slow – so as not to jeopardize user experience – expecting ads/DAU/hour to grow by 8% in '17 (vs. 15% in '16). Even this deceleration could prove overly conservative given the potential for other platforms with lower ad load levels – Instagram, Messenger, and FAN – to start contributing more," said Nowak.
The analsyt continued, "But ad load is only one factor driving FB, as its scale (1.1bn DAUs, up 17% Y/Y in 2Q:16) and strong engagement (each DAU spending 51 minutes/day across Facebook, Instagram, and Messenger) are more important, together driving an estimated 57% of FB's '16 ad revenue growth. FB's growing base of engaged users gives it more ad impression opportunities and data to serve higher quality ads. Recent strong DAU and engagement trends cause us to sharpen our forecasts, and we are raising our '17 DAU estimates by 22mn (1%) and fully incorporating time spent per DAU – now modeling it to rise 5% in ‘17 (from 11% in '16). Note this deceleration could be overly conservative too if product innovation continues to expand FB's use case."
Discussing ad pricing, Nowak added, "We believe advertiser demand for FB remains strong and that ad unit pricing – determined in FB's advertiser auction – has room to head higher for 2 reasons. Firstly, there is acontinued mix-shift toward new,higher-priced and better performing ad units like Canvas ads, Dynamic ads,and video. Secondly,FB’s scale has kept effective pricing low vs. other traditional and online offerings (we estimate a 70%-80% discount), meaning there is room for like-for-like CPM increases (over time) as demand growth outpaces supply. As such, we believe average unit pricing will continue to rise, modeling 11% growth in '17."
Morgan Stanley's bull case on Facebook is $200, and its bear case is $100.
Shares of Facebook closed at $129.73 yesterday.
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