- JP Morgan Analyst Doug Anmuth recently raised his target price for Facebook stock to $175, up from the earlier $150.
- This should come as a reassurance to investors following the recent controversy around Facebook's video measurement metrics.
- Should investors follow the latest buy call and buy into Facebook stock? Is Facebook stock an attractive buy today?
Facebook Inc. (NSDQ:FB) was recently in the news for the wrong reasons. The world's second largest online ad market platform disclosed that the company was wrongly reporting a video metric on the platform for the last two years. The company was excluding the videos viewed for less than 3 seconds in its 'average video viewed' metric. This, in essence, inflated the metric as it only accounted for those users who stayed on a video for longer durations. With this disclosure, the company raised fears of scaring away ad publishers. However, recent reports by analysts claim that the publishers and ad sellers on the platform do not view the error as something major enough to drive them away from the platform. Hence, the impact on Facebook's momentum could be minimal.
In a separate news, JP Morgan analyst Doug Anmuth hiked his Facebook stock price target to $175, up from $150, which came as a reassurance to investors following the measurement error. But, can Facebook really deliver on these expectations and reward investors with such gains? Can the firm outgrow its current valuations, which are steep? Let's understand by looking at the various parts of the Social media giant.
Core Facebook Platform
To get a 'bird's eye view' understanding of Facebook's core platform, investors need to look at 2 metrics: ARPU (Average Revenue Per User) and MAU (Monthly active users). These metrics, essentially drive Facebook's top line growth. Facebook closed the last quarter (Q2 2016) with MAU of 1.7B and quarterly ARPU of $3.86 or annualized ARPU of $15.44. Its noteworthy to point out that the two metrics have seen an uptick in growth over the last few quarters, even though Facebook has reached a gargantuan size. Facebook's ARPU growth has never dipped below 23% over the last 10 years, while the MAU growth has always been above 12%. Going by the historical trend, it is fair to believe that the company can continue to grow on these metrics. While MAU growth will be driven by further penetration into the global internet user base, ARPU growth will be driven by the tailwind of a growing online ad market and also the growth in the number of advertisers (demand) on the platform.
Assuming a 10% annual growth in the Facebook user base puts the 2020 MAU's at 2.28B, which is a reasonable estimate given that the number of global social network users is expected to near 3B in 2020. Coming to ARPU growth, assuming an average annual growth rate of 18% over the next 4 years (10 quarter avg is 33.5%) puts 2020 ARPU at $29.6, working off the annualized base of $15.28 as of Q2 2016 end. Based on these assumptions, Facebook should be able to net $20.32B (30% margin) Net Income in 2020 on a top line of $67B. Using a 20X earnings multiple puts core Facebook platform value at $406.4 billion.
Messenger, Whatsapp and Instagram Valuation
The LINE IPO was the biggest IPO in 2016. Given the fact that Line is essentially a messaging app, we can use the LINE valuation as a ballpark to value Facebook's two messenger properties: Whatsapp and FB Messenger. LINE is currently valued at $10.77B with a user base of 220M, putting the per user value at nearly $49. Using a value of $30 per user (in line with conservatism), we can arrive at a $30B valuation each for Whatsapp and FB messenger. We use Snapchat as a comparable for Instagram, given great similarity in their use cases and the overlap in their target demographic (younger population). Snapchat, with 100M users, was valued at $22B during its last funding round in March 2016, implying a per user value of $220, which we believe could be way too optimistic. Hence, we use a more conservative per user value of $100. A value of $100/user multiplied by the Instagram user base of 500M MAU puts Instagram value at $50B.
Facebook Stock SOTP Valuation
Based on the SOTP approach and calculations detailed above, we arrive at a valuation of $516.38 for Facebook. This implies a per share price of $179 (no of shares based on Facebook's current market cap and current price per share), implying an upside of nearly 40% from the last traded price for Facebook stock (Sep 29). Investors should note that these are based on very conservative estimates and exclude the impact of the Oculus project and other AR/VR efforts of the company. Hence, Facebook stock could rise to far higher levels in reality.
JP Morgan analyst Doug Anmuth recently raised his Facebook stock target price to $175 per share. Using an SOTP valuation, we throw some light on why Facebook stock price could rise above these levels as the company begins to monetize its other properties. Hence, Facebook stock is a good opportunity for long term investors.