Even amid cautious outlook we are boosting target price for Facebook
In this Alert:
- We are boosting our price target on Connected Society company Facebook (FB) to $160 from $150.
- Even so, we are now rating the shares a Hold, and would only commit new capital if the shares move closer to $145 or below.
We are boosting our price target on Connected Society company Facebook (FB) to $160 from $150 following this week’s better than expected 1Q 2017 quarterly results and arguably cautious outlook. That boost to our price target, paired with the share’s retreat since hitting a new 52-week high on Tuesday, offers upside of roughly 6.5 percent, and as such we are changing our rating on the shares from a Buy to a Hold.
We’ve had a remarkable run in the FB shares, climbing more than 24 percent, even after the week’s lift since we added them to the Tematica Select List back in late November. For subscribers that missed our recommendation, we’d suggest nibbling closer to $145 or below or on signs the telegraphed advertising slowdown fails to emerge.
As we started to say above, earlier this week Facebook reported March quarter revenue and EPS that handily beat expectations with EPS coming at $1.04, $0.18 ahead of expectations. Revenue for the quarter rose just over 49 percent year over year, reaching slightly better than $8 billion with advertising comprising 98 percent of total quarterly revenue. Compared to year ago levels, revenue growth was had in all four geographic regions led by Rest of World up 66 percent and Asia-Pacific up 60 percent. Slower growth was had in the US & Canada, which represented 49.4 percent of quarterly revenue vs. 51 percent in the year ago quarter. The continued shift to mobile by consumers in the US and faster growth in Rest of World and Asia-Pacific, which tends to be more mobile first, led mobile advertising to reach 85 percent of Facebook’s total advertising revenue for the quarter, up from 82 percent in the year ago quarter. To us, data like this cements Facebook’s position in our Connected Society investing theme.
After reporting robust results and beating Wall Street expectations, Facebook threw some cold water on things when it shares it view calling for a meaningful slowdown in ad growth revenue, due in part to desktop ad blockers, and expense to rise 40 percent -50 percent year over year. In looking for some perspective on Facebook’s slowing ad growth claim, we scoured for some perspective and found that eMarketer sees digital advertising hitting $83 billion in the US this year (up more than 15 percent year over year) of which $58.4 billion will be derived from mobile advertising (up 25 percent year over year). This suggests to us at least that Facebook’s claim for slowing ad revenue growth is likely to be conservative, but in the here and now, Wall Street is reacting to management’s outlook.
Over time, we’ll be checking the data and if eMarketers forecast looks to ring true we’ll plan on revisiting our Facebook price target and rating. Even as we remove our Buy rating, we would argue that jus like Amazon (AMZN) and Alphabet (GOOGL), Facebook with its various digital properties that are embracing monetization strategies are shares to own, not to trade as consumers, businesses and other entities migrate deeper into our increasingly Connected Society.
