Buy the Dip in Facebook (FB), RBC Capital Says

RBC Capital analyst Mark Mahaney reiterated a Outperform rating and $92 Facebook (NASDAQ: FB) following strong Q3 results with a material increase in opex. The analyst is telling clients to Buy the dip.

Keys in the quarter, according to the analysts: 1. More Friends – MAUs up 14% Y/Y to 1.35B (excl. Instagram & WhatsApp), better than expected; 2. More Friendliness – DAU/MAU ratio (measure of engagement) rose to record-high 64% overall and expanded in every geography; 3. Broad Geographic Growth – 50%+ Ad Rev growth in every region; 4. Rising Monetization – ARPU +40% Y/Y to $2.40, and that’s still only a quarter that of Google; 5. Mobile Now @ 66% Of Ad Revenue – grew 122% Y/Y; 6. Margins Surprise To The Upside – 55%A vs. 53%E, more evidence of leverage in the model; and 7. 178MM New Shares to Trade – from the WhatsApp deal, could be tradable later this week.

The analyst is recommending buying the dip. "FB shares traded off 8% in the aftermarket. While the shares aren’t exactly “for sale” – they are up 36% YTD and trade at a robust 35x P/E – we are Buyers Of This Dip. Why? 1. We have already seen relatively rapid share price recoveries post Q3 EPS corrections – AMZN up 4%, EBAY and GOOG up 7%, NFLX up 16% – so this market is buying beaten-down Net stocks. 2. More importantly, FB’s Q3 P&L and Metrics results were intrinsically very strong – arguably, the cleanest ‘Net so far. 3. Ramping up investments – from a position of strength – in many promising, high-growth areas (e.g. video –now at 1B daily video views). 4. Those high growth areas represent four greenfield revenue opportunities (Instagram Monetization, Auto-Play Video Ads, FAN and WhatsApp) that can contribute $2.7B+ in incremental Revenue in ‘15 (per our 8/29 ULT report), offsetting the stepped-up opex, and leaving our near-term EPS estimates largely unchanged, but our long-term estimates increased. And 5. Per our valuation work, FB remains one of the most attractive Large Cap Nets on a growth-adjusted valuation basis – EV/EBITDA/Growth < 0.5X."

For an analyst ratings summary and ratings history on Facebook click here. For more ratings news on Facebook click here.

Shares of Facebook closed at $80.77 yesterday.

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