Facebook (FB) Investors Fear Slowing Growth But Catalysts Indicate It's Not In The Near Future

Baird analyst, Colin Sebastian, reiterated his Outperform rating on shares of Facebook (NASDAQ: FB) after meeting with investors and noting that conversations suggest lingering concerns related to competition, declining engagement, ad load, and tough growth comparisons. The analyst believes that Facebook remains well positioned to aggregate a disproportionate share of advertising budgets for years to come and broke down his thesis into the following parts:

Ad Growth: "the Street’s knee-jerk reaction to moderating ad load growth is based on the view that this is most important driver of advertising revenue growth". The analyst believes this view is short-sighted and ignores pricing and ad engagement which could benefit from constrained ad loads.

Competition and Engagement: Regarding competition, the analyst stated "we believe it is too simplistic to believe that Snapchat’s success comes at a cost to Facebook. This reminds us of the flawed view that Facebook’s revenue growth would come at the expense of Google". On engagement, the analyst said "one of the key drivers of increasing engagement metrics (DAU/MAU ratio) on Facebook is the shift from desktop to mobile usage" and "there is likely to be more stability in engagement going forward".

The analyst believes that out year revenue drivers continue to be overlooked:
-Instagram remains in the early stages of revenue growth
-Messenger could add monetization sometime in 2017 (assume B2C paid interactions)
-WhatsApp should be monetized at a later point (recent terms of service changes may lay the groundwork for ads).

To keep this in perspective, the analyst points out that there are only currently ~200k advertisers using Instagram vs. 3 million+ on Facebook.

No change to the price target of $155 which is based on a combination of a multi-year DCF as well as 35x 2017E P/E and 15x 2017E EV/EBITDA. The analyst points out that peer group multiples are 29x 2017E EPS and 14x 2017E EBITDA.

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 $126.51 yesterday.

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