- Citi Analyst Mark May recently reiterated a buy rating and upped his Facebook stock target price to $158.
- Facebook stock is up over 20% in the year-to-date. However, recent concerns regarding ad load growth on the platform and competitive threats have surfaced.
- Is there an opportunity to buy Facebook stock today?
Facebook Inc. (NASDAQ:FB) stock has been on a tear in 2016. Facebook stock price is up over 21% in the year to date, outperforming the Nasdaq Composite (INDX:COMPX), which is up 3.33% over the same time. Given the strong gains the stock has made, many investors could be considering booking profits now. However, now might not be the best time for profit booking. Why? Well, the Facebook stock could get hotter from here. At least, that's what CITI Analyst Mark May believes, raising his FB target price to $158, up from the earlier $148. Should investors book profits? Or will there be time to win more?
Are Wall Street's Facebook estimates too conservative?
In the latest research note to investors, CITI analyst Mark May noted that concerns around ad load growth and competition from Snapchat are weighing down on Facebook valuations. He further stated: "We analyzed these concerns by stress testing key underlying FB model assumptions and concluded that Street forecasts not only appear reasonable but also potentially conservative." Analyst growth estimates peg Facebook's earnings to grow at an annual rate of 35.4% over the next 5 years. This compares against a 69% average annual growth over the last 5 years. While the slowdown is understandable given the larger base, calling 35% as conservative is still hard to believe. Do these bold claims of Mark May hold any water?
Facebook is blowing past analyst estimates
Facebook Inc. has blown past analyst estimates in the last 4 quarters, delivering an earnings surprise of nearly 10%+ in each of the last 4 quarters. Investors should take note of the fact that the company has beaten Wall street's earnings forecast by nearly 21% in the first half of 2016, which is an acceleration from the 10% earnings surprises delivered in the 4 quarters of 2015. With the margin between analyst estimates and actual earnings rising in the last couple of quarters, Mark May's claims of Wall Street being too conservative do, in fact, hold true.
Also interesting is the fact that Facebook has been defying the law of large numbers. What exactly is this law? Investopedia explains it as:
In a financial context, the law of large numbers indicates that a large entity that is growing rapidly cannot maintain that growth pace forever.
While the earnings growth has fallen from a peak of 183% YoY growth in Q1 2014, it was only expected that Facebook's earnings growth would slow as the earnings base got larger. However, the company has surprised investors and analysts alike with the growth reported in 1H 2016. Facebook management had pointed to increasing ad loads as a key driver of Facebook's strong performance over the last couple of quarters. The management had also stated that ad loads will be less of a factor in coming quarters, which has made investors nervous. However, this shouldn't be much of a concern as ad loads will grow on other platforms like Messenger and Instagram.
Also, in a recent post, we had addressed the concerns around Facebook's engagement metrics and the competitive threat from Snapchat. Facebook's engagement metrics are growing consistently, which should also help to fuel Facebook's growth rate and offset the slowing ad load growth. This will also be aided by the growth in CPM and CPC rates on the platform, which are directly dependent on Facebook's ability to target its ads. Hence, Facebook's CPC and CPM growth will be key metrics to watch our for in addition to engagement levels on the platform over the coming quarters.
Facebook Stock Could Hit $150 Faster Than Many Think
Facebook has delivered a solid earnings growth in the first 2 quarters of 2016. Given the recent earnings strength and the rise in Facebook's earnings growth, FY 2016 earnings should closer to the higher end of analyst consensus at $4.18 will be very much on the cards. Working off a target PEG ratio of 1 and the expected 5-year earnings growth of 35, an earnings multiple of 35 should be reasonable. Using an earnings multiple of 35 and FY 2016 earnings of $4.18, the target for Facebook stock come in at $146. Add to it the fact that the stock has handily outperformed the top end of analyst expectations over 2016, and we could be staring at a Facebook stock price of $150 faster than what many think. Hence, Mark may's call with a target price of $158 looks reasonable, to say the least. Facebook stock is a clear buy at the current levels and profit booking now could mean missing out on bigger gains ahead.