Facebook (FB): Heavy Investment More than Offset By Accelerating Rev Growth - Baird

Baird analyst, Colin Sebastian, highlighted Facebook (NASDAQ: FB) as its top pick after accelerating revenue growth and margins came in ahead of expectations. No change to Outperform rating but the price target increases to $120 from $116.

Mobile momentum drove Q4 upside. Q4 revenues and EPS of $5.8 billion (+60% Y/Y ex-FX vs. +51% in 3Q15) and $0.79 were above consensus of $5.3 billion and $0.68. Key highlights include mobile ad revenues increasing 82% Y/Y (vs. 67% Y/Y in 3Q15; 80% of total vs. 69% in 4Q14), while total advertising revenues increased 66% Y/Y ex-FX (57% in 3Q15). Operating margin and EPS were also ahead of our expectations largely due to operating leverage.

Key user metrics/engagement trends remain solid. Facebook MAUs reached 1.59 billion (+14% Y/Y), while total DAUs and mobile DAUs grew 17% and 20%, respectively, with Mobile strength offsetting slower desktop usage. Outside of the core Facebook app, Instagram, Messenger, and WhatsApp now have over 400M-800M-900M MAUs, respectively.

Beyond solid user metrics, management highlighted gains in video consumption, with >100 million hours of video watched daily on Facebook. Instagram ads are also performing well to-date, but the platform is still in nascent stages of monetization. Additionally, direct-response ads in mobile newsfeed (dynamic product ads, carousel ads, etc.) were highlighted as areas of monetization strength.

Initial 2016 opex guidance suggests another year of heavy investment. Management guided to op-ex growth of 45-55% Y/Y, as investments in Oculus, internet connectivity, and artificial intelligence in addition to core apps require ongoing headcount additions and infrastructure build-out. Worth noting, last year's initial opex guide of +50-70% proved conservative, as FY15 opex increased +47% Y/Y, due to higher revenues.

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 $94.45 yesterday.

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