Inside Wall Street: Facebook turns to money making
The giant social media enterprise gets much bigger as it pursues innovative strategies.
Some of the happiest investors these days are those who have stuck with Facebook (FB) through its many travails since its controversial IPO. The bears believed Facebook faced grim prospects in turning in profits from its social media activities. Wrong. Facebook has been on a roll in recent months.
At the massive Money Show Conference held in Orlando, Florida, early this year, I expressed bullish sentiment towards Facebook, when its stock was on the ropes, at around $19 a share.
When I first wrote about Facebook in this column in February, the planet's largest social media entity was one of the most disliked, if not among the most hated stocks -- perhaps no wonder after the stock fell off the cliff after going public on May 18, 2012. The stock had plunged to as low as $17.50 a few days after the IPO that was priced at $38 a share. Nonetheless, I headlined my story as, "Facebook is a must-buy stock," then trading at $29 a share.
True enough, the stock has since surprised its critics by relentlessly pushing upward, closing at $43.95 on Sept. 6, 2013. Can Facebook continue its upward momentum in the face of increasing competition and fast-breaking technology? Skeptics still abound, to be sure, but Wall Street and some big investors are finally getting convinced that Facebook has the management skills and will to create novel money-making products and serve as a platform for effective ads that should make it a social-media powerhouse.
Looking at the experience and expanding valuations of Internet giants such as Amazon.com (AMZN), Google (GOOG), Apple (AAPL), and eBay (EBAY), Facebook's potential is almost limitless as the pioneer and global brand in social media. Not surprisingly, a number of analysts have raised their price targets and revenue and operating earnings projections for Facebook.
Robert S. Peck, analyst at SunTrust Robinson Humphrey, this month raised his revenue and EBITDA (earnings before interest, taxes, depreciation and amortization) estimates to reflect recent and expected product launches. "As video ads, Instagram monetization, and graph search roll out, we think revenues could rise by $2 billion in 2017 or 10%," says Peck. He expects his estimate on the company's EBITDA should also increase by $1 billion in that time frame, "providing further financial lift" to Facebook.
His positive ("buy") recommendation on Facebook, says the analyst, has been largely predicted on the tremendous options that Facebook's large 1.1 billion active user base provides." With Facebook's reach, Peck says, the company can drive a significant impact on its financials with more new products and enhancements. "We think the video ads, Instagram monetization, and graph search pose enormous lift potential for the company," says Peck.
Based on his increased estimates, the analyst boosted his price target on the stock to $55 a share from $40. Peck raised his 2014 revenue estimate to $10 billion from $9.6 billion, and his 2015 forecast to $13.1 billion from $12.4 billion. And he raised his EBITDA 2014 projection to $5.5 billion from $5.3 billion, and his 2015 estimate to $7 billion from $6.7 billion.
Peck says the bear thesis on the stock was broken as Facebook grew revenues from its mobile operations to 41% from 0% last year, and from 30% in the first quarter of 2013. It also reported revenues accelerating to 53% from 38%, he notes, "and demonstrated incremental operating margins of 67%."
Analyst Colin Sebastian of investment firm Robert W. Baird, who rates the stock as "outperform," has also raised his revenue and earnings estimates, describing Facebook as the "gravitational center of social media." After industry checks and data points, he says, "we believe that positive momentum for Facebook continues into the third quarter, and there is likely upside to consensus estimates," says Sebastian. Facebook's new mobile products remain the key source of the momentum, he adds.
The long-term growth outlook for Facebook "still remains robust," says Sebastian. So he has raised his earnings forecast for 2013 to 70 cents a share from 65 cents, and upped his revenue projection to $7.4 billion from $7.3 billion. For 2014, the analyst increased his profit forecast to 93 cents a share from 81 cents, and his revenue projection to $9.6 billion from $8.9 billion.
In the coming years, "we see multiple sources of incremental growth, including video/Instagram ads, launch of an external advertising networks, international monetization, and optimization/simplification of ad formats that drive pricing and impression growth," says Sebastian. A big part of Facebook's advance, he notes, is that it's gaining "momentum from both brand and response marketers on a global basis,"
In sum, Facebook is turning the page to money making through continued innovation in the widening world of social media
"We think Facebook has considerable competitive advantages in social media due to its singular global brand, substantial use base, high levels of engagement, and considerable access to user data and information," says Scott Kessler, analyst at S&P Capital IQ.
Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.
Copyright © 2014 Microsoft. All rights reserved.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.