Facebook Shares Find Some Life But Execution Risk Is Still Huge
Facebook’s (NASDAQ:FB) stock has risen from a little over $19 to close to $26 over the course of past 2-3 weeks, registering an increase of 35%. The optimism created by Facebook’s Q3 earnings results, analyst upgrades and certain trading activities are some of the key factors fueling this stock rally. We feel that it is worthwhile to visit some of these factors and also discuss the risks that Facebook faces from a long-term perspective. Even though the stock may continue to rise in the near term, investors should be aware where the fundamentals are going and whether this stock surge is sustainable.
See our complete analysis for Facebook
What Is Fueling Facebook’s Shares?
One of the reasons is the optimism created by Facebook’s Q3 earnings results. Accelerated revenue growth and a ramp-up of mobile advertising were the key highlights of the company’s earnings. Facebook’s management also outlined several initiatives that the company is taking and shared its vision for mobile monetization in order to dispel investors’ concern about the company’s ability to monetize its mobile platform. In the near term, the company could sustain high revenue growth due to its emphasis on mobile and that could further support the stock.
Another reason is some specific trading activities that have taken place over the past few weeks, primarily in light of the newly unlocked employee owned shares coming into the market. The general expectation was that Facebook’s stock will decline when these shares flood the market, however the opposite happened. Perhaps the employees were not as desperate to dump their shares in the market this time as they were the last time when a block of shares unlocked leading to a substantial stock price decline. A lot of bears who had taken short positions due to this expectation started covering their positions when the stock didn’t go down, thus fueling the stock rally. Typically, when the market doesn’t go the expected way on a major development, it swings in the other direction due to the aforementioned trading activity.
Lastly, there have been several major analyst upgrades for Facebook’s stock recently including those by Bernstein Research, BTIG and Piper Jaffray. [1] [2] These upgrades and reiterations have further provided fuel for the stock surge.
But Don’t Forget The Risks!
Is this stock move sustainable?
There may be more rally in near term but the long-term risks that remain are how well Facebook can monetize the mobile platform and how big a competitor can Google Plus eventually be. Growth in mobile revenues has been impressive recently, but its sustainability will be determined by the results of the upcoming quarters.
The problem is simple. Facebook’s users are increasingly accessing the social network on mobile devices where there is not much real estate to put ads. Additionally, Facebook does not serve audio ads unlike Pandora, and thus is completely reliant on the visual ads. Even though the problem is straightforward, the solution is not. Any attempt to significantly increase the ads on mobile platform will affect the user experience negatively due to limited real estate on mobile screens. Keeping this in mind, we forecast very low growth in revenue per 1000 page views. We expect this figure to increase from close to 29 cents in 2011 to 35 cents by the end of our forecast period.
However, there is a chance that Facebook’s efforts to effectively monetize the mobile platform fail and growth in international markets further puts downward pressure on the monetization levels. If these factors actually push down the monetization to 20 cents per 1000 page views by the end of our forecast period, there could be 40% downside to our price estimate for Facebook. We have already incorporated lofty expectations for mobile growth in our forecasts for total user base and page views per user. We forecast Facebook’s total user base to double to 2 billion by the end of our forecast period and expect the page views per user to continue to grow as well.
Additionally in Q3 2012, Facebook saw a decline in revenues that it earns from Zynga’s games which has been one of the major revenue generating businesses for the company. We believe that Facebook will promote a large ecosystem of game developers to reduce its reliance on Zynga. As far as Google Plus is concerned, it could emerge as a good long-term competitor and already has 100 million plus active users. That’s not a small amount and Google has the capability to further grow its social network and do everything that Facebook does.
Our price estimate for Facebook stands at $25, implying a slight discount to the market price.
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Notes:- Facebook ‘Bear’ Gets Optimistic; ‘More Upside Than Downside,’ Bernstein Says, The Wall Street Journal, Nov 26 2012 [↩]
- Piper Jaffray Reiterates Facebook Inc (FB) At Overweight, Lowers PT, Valuewalk.com. Nov 19 2012 [↩]