Facebook Stock Momentum Driven By VR, Instant Articles And ComScore Data

  • Facebook builds on advertising partnership via its instant article partnership.
  • Facebook's data trends went through a blip due to measurement changes via comScore.
  • The company remains a sound investment due to VR, Instant Articles and continued audience growth.

In recent news, Facebook (NASDAQ:FB)) is looking to further strengthen its advertising partnership with various media companies. Facebook is now allowing Instant Article publishers to include an additional advertising unit at the bottom of every article on top of the number of ads currently allowed (one ad for every 350 words of content).

Facebook believes that the move will increase ad impressions by more than 20%. While the figure sounds promising, the extent to which this will affect the company on its upcoming earnings report is still up for debate. Facebook doesn’t break out audience traffic from Instant Articles separately, so quantifying the incremental ad revenue isn’t possible.

However, there are some caveats to how Facebook earns revenue from Instant Articles. If the publisher is able to sell the ad slot independently without leveraging Facebook’s ad market place, the publisher doesn’t have to pay a cut to Facebook. However, if the publisher does utilize Facebook’s ad sales channels, Facebook takes a 30% cut from the publisher’s advertising revenue.

Given the incentive for publishers to sell premium inventory at higher CPMs (cost per thousand impressions) via direct channels, it’s not yet clear if Facebook’s marketplace is even being utilized by its Instant Article publisher ecosystem. After all, many online publishers have the back-office capacity to sell advertising at premium rates relative to the pricing that’s quoted by programmatic ad networks like Double Click, MoPub and Atlas Solutions. Therefore, Instant Article could be near term accretive to Facebook’s earnings/sales, but I’m really not anticipating the incremental impact to be more than a blip on most analyst models.

In other news, Facebook’s comScore data went through a momentary blip due to measurement changes. The data on time share was somewhat alarming but after factoring in measurement change/iOS app changes, the data is skewed negatively and is inconsistent with prior data.

Quoted from BofA Merrill Lynch Global Research:

Facebook sites (all sites) total Internet time spent share decreased to 16.8% from 18.1% last month. There was a Facebook iOS app update in October which affected the iPhone and iPad platforms, effectively skewing y/y growth rates. Facebook.com (core Facebook) mobile users were up a stable 11% y/y (3% lift from comScore changes) while PC users were up 8%. However, Facebook.com total U.S. minutes were down 11% y/y and mobile minutes were down 14% y/y (again due to measurement changes), while PC minutes increased 2% y/y (vs. up 3% y/y for industry). Facebook messenger minutes were up 27% y/y February. Instagram mobile users were up 2.9mn m/m at 96mn and are up 33% y/y.

The 5% decline in mobile minutes in the month of February should be disregarded, as the negative data is driven by changes in methodology. I feel fairly confident that Facebook can sustain DAU/MAU growth in the upcoming quarter. Of course, I model out my assumptions using a 3% sequential run rate for MAUs (monthly active users), and 10% growth rate in ARPU (average revenue per user). I’m maintaining my stance on revenue and continue to forecast revenue of $27.474 billion in FY’16.

I know my estimate is higher than the consensus, but given the near-term drivers to revenue growth via ad pricing/inventory increases and incremental opportunities via the Oculus Rift, I believe the consensus is a conservative estimate.

Facebook also released their Oculus Rift on March 28th 2016 (Monday this week). Currently, Deutsche Bank estimates that Facebook will sell 1 million units in its first year, which implies that at a $599 ASP (average selling price), revenue accretion of $600 million seems feasible. Reviews for the Oculus were all around positive, and supply continues to be constrained, so there’s upside to analyst shipment models. Of course, the market opportunity is limited to enthusiast PC users, but after two-years of Maxwell and Fiji architecture, I believe there are enough PCs on the market to support the launch of VR.

Oculus is considered a truly immersive gaming experience, according to many of the reviewers who have tested the device in the initial week of launch. However, many have complained about motion sickness, and the degree of realism they had experienced. In other words, it’s not like walking up to a two-dimensional portrait and sticking your face closer to the image. The experience is truly stereoscopic, and many have reported that the feeling of depth and presence is what differentiates VR. Assuming Facebook is sitting on a true next-generation device category, I feel fairly confident that Facebook’s revenue from hardware will accelerate (in other words, success comparable to the iPhone is attainable).

I continue to reiterate my high conviction buy recommendation on Facebook. It remains the best positioned social media company and recent events support a bullish bias towards company fundamentals. I’m raising my price target from $125.92 to $163.21. I know I’m optimistic here, but the recent recovery in equity prices and continued strength in fundamentals support momentum in valuation.

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