Needham & Company Starts Facebook (FB) at Buy, $40 Price Target

May 23, 2012 7:26 AM EDT
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Price: $127.55 -0.29%

Rating Summary:
    48 Buy, 9 Hold, 1 Sell

Rating Trend: Up Up

Today's Overall Ratings:
    Up: 23 | Down: 36 | New: 34
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Needham & Company initiates coverage on Facebook (NASDAQ: FB) with a Buy rating and $40 price target.

"With over 900mm monthly unique users, we believe FB is an option on the World. The best question for FB is how to value it. Our point of view is that FB should be valued based on revenue potential from total minutes spent on FB times its powerful margin expansion engine."

The analyst highlighted:

1. Consumer adoption. We believe that the potential to generate revenue is limited by consumer demand for your product online. Monthly users are the best proxy for consumer acceptance, since consumer substitution is easy online. FB has about 900mm monthly users after 8 years in existence, about 90% of Google’s 1 billion monthly users after 14 years.

2. Time Spent. We believe that money follows time. FB represents approximately 14% of time spent online globally (comScore), suggesting that its revenue potential is $14B globally and $6B from the US alone, calculated as 14% of Zenith’s global internet revenue estimate of $98B and eMarketer’s US internet estimate of $46B in 2013.

3. Margin Expansion. The operating margins at FB are enormous and expanding, at 33.7% in 2009, 52.3% in 2010, and 47.3% in 2011. This powerful economic engine suggests profit growth will be faster than revenue growth.

4. Execution. FB has already solved the two hardest execution risks online-discovery and relevance. The biggest execution risk that remains is monetization. Advertising, payments, social graph services – since we believe that money follows time, we also believe the FB platform offers several ways to solve the monetization puzzle. We completed a proprietary survey of FB users that highlighted several monetization

5. Global Scale: FB's global platform with long engagement times gives it a unique strategic position to generate revenue from global advertisers, payments, services, etc. It also represents a meaningful barrier to entry

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 $31.00 yesterday.

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