Why analysts are chasing Facebook shares higher
Facebook Inc. (NASDAQ: FB) won on earnings through explosive mobile usage, and as a result the stock is cruising near alltime highs. Just looking around these days, it is evident that most people use their smartphones for social media, whether it’s posting pictures of their lunch to Instagram or hitting up Facebook Messenger at a red light. The obsession is very real, especially on the mobile platform. Analysts have seen evidence of this and are raising their ratings and targets to new highs, reflecting not only the strong earnings from this quarter but also the equally strong outlook as well.
Facebook reported that revenue was $4.501 bln, up from $3.203 bln last year and above the $4.37 bln consensus estimate from Thomson Reuters. The adjusted earnings per share (EPS) was $0.57, versus $0.43 a year ago and the consensus estimate of $0.52.
Of the $4.501 bln in revenues, some $4.299 bln was in advertising, up 45%. Facebook’s total costs and expenses rose by 68% to $3.042 bln. Excluding the impact of year-on-year changes in foreign exchange rates, the company showed that total revenue would have increased by 51%.
The metrics that matter were as follows: - Daily active users (DAUs) were 1.01 bln in September, up 17%. - Mobile DAUs were 894 mln, up 27% y-o-y. - Monthly active users (MAUs) were 1.55 bln, up 14%. - Mobile MAUs were 1.39 bln, up 23%.
What is shocking about these statistics is that with a global population of roughly 7.4 bln, DAUs total 13.6% and MAUs total nearly 21% of the entire global population. Considering this global exposure, Facebook is easily the largest media stock out there, with a market cap of over $300 bln. The next largest media stock would be Disney with a market cap of roughly $190 bln.
Making such a monumental move to new highs, Facebook is drawing analyst calls like moths to a flame. While most firms have Buy or Outperform ratings, many price targets were hiked: - Merrill Lynch (Buy) increased its objective to $125 from $115. - BMO Capital Markets raised $105 from $94. - Stifel Nicolaus $108. - RBC Capital from $105. - Morgan Stanley $120 from $110. - Credit Suisse (Outperform) raised to $135 from $115. - Barclays (Overweight) raised to $140 from $105. - FBR $118. - Pivotal Research (Buy) raised to $134 from $127. - Nomura reiterated a Buy rating with a $115
(Buy) raised to $120 from
(Outperform) raised to $130
to $125 from target.
Shares of Facebook were recently trading up nearly 6% at $110.06, after hitting a new all-time high. The stock has a consensus analyst price target of $112.73 and a 52-week trading range of $72.00 to $110.65.
Facebook’s growth rates may slow, particularly as its penetration efforts reach areas without Internet connectivity or where literacy levels necessary to use the social network are very low. CEO Mark Zuckerberg would like to solve the Internet penetration problem by creating technology that will cover the world in connectivity. However, his most recent efforts in India, the world’s second largest nation by population, have met some resistance. The level of pushback may increase the odds against his long-term “Internet everywhere” plan.
Zuckerberg’s problem, among others, is that critics believe his desire to increase the Internet population is only a means to create a larger audience for Facebook. While that could be true, it does not argue that people should be deprived of the Internet because Zuckerberg might, and only might, add them to his empire. Spreading the Internet has benefits in and of itself, not the least of which is giving hundreds of millions of people access to the outside world via news, entertainment and social sharing.
Whether Zuckerberg can expand Internet availability widely, he does not need it as a means to reach short-term earnings goals. Facebook has over $15 bln in the bank, which should support any efforts to drive the company’s audience higher, although user expansion apparently takes care of itself. There is no evidence that Facebook “buys” users. The social aspect of the social network works well enough on its own. Growth of other social networks supports that.
Could Facebook’s user base reach 2 bln even without universal Internet coverage? As quickly as it is growing, Facebook has a chance.