By Cody Miecnikowski
Investors are holding Facebook Inc (NASDAQ:FB) under a magnifying glass as analysts weigh in on the company’s future direction. The company has shown continuous momentum, but some analysts argue that such growth is not sustainable.
After the closing bell on June 29, shares of Facebook were $85.81. This is near the company’s 52 week high of $89.90 and far from the low of $62.21. The average trading volume for Facebook has been about 23.2 million shares per day over the last 30 days.
The social media site currently has about 1.44 billion active users per month, while its share value has increased 9.97% YTD. This is assuring to investors compared to the 1.27%decline and 0.06% decline witnessed by Dow Jones and S&P 500, respectively.
Societe Generale analyst Christophe Cherblanc weighed in on Facebook on June 26, reiterating a Sell rating on the stock with a $68 price target. The analyst feels confident that the company’s momentum won’t last much longer and that Wall Street’s excitement over the social network’s mobile ad revenue could be premature. Despite the fact that mobile made up about 73% of the company’s total ad revenue, the analyst believes that this cannot be sustained.
Cherblanc lists three main reasons why investors should be worried about Facebook. First off, the time that a U.S. consumer has spent using Facebook on either an Android or iOS device has fallen from 18% in 2013 to 17% in 2014. Despite Facebook’s growing user base, the company’s reach is being shortened by a growing number of available mobile apps. Secondly, Facebook’s acquisition of WhatsApp last year is believed to be a defense against this reach dilution. The company paid $19 billion, nearly 10% of its capital to finalize the deal. Cherblanc adds that investors should expect continued investment in apps. Lastly, consensus estimates for growth in users, revenue and EBITDA suggests that Wall Street “has baked in a survivor bias notwithstanding several potential destabilizing risks to its user momentum.”
Later in Cherblanc’s report, he goes on to make a connection between shares of Google Inc (NASDAQ: GOOGL) in 2007 and Facebook’s shares today. He makes several key points to justify his argument: Google was recording a 52% growth rate for its revenue, while Facebook’s revenue is expected to grow 40% this year. Google was trading at 11 times EV/sales, while Facebook is now at 13.6 times 2015e. Lastly, in 2007 analysts believed that Google had its prime five years ahead of it. Now, most analysts believe the same is true for Facebook.
Here’s the problem: Google shares declined 65% and then took five years to recover to get back to its “normal” share price.
Overall, Chistophe Cherblanc has a mere +1.7% average return per stock recommendation.
On the other side of the debate is Merrill Lynch Analyst Justin Post, reiterating a Buy rating on Facebook with a price target of $105. The analyst argues that the stock is a top idea in Internet and media given mobile exposure and growing time share, video traction, Instagram ad ramp, and growth of new platforms.
The inflection point in Internet advertising is creating an environment in which Facebook can be seen as a global media communication platform instead of just a social media company. Auto-play video ads, FAN, Atlas, LiveRail, and the recently expanded buy button are all at the core of this change.
In regards to Instagram, Facebook’s management team announced an expansion of advertisements on the app, progressing to fully monetizing the platform.
Post goes onto to say that he “sees the company’s Instagram and WhatsApp as big opportunities with multi-billion dollar price tags each.”
Justin Post currently has a +18.3% average return per stock recommendation.
Cantor Fitzgerald analyst Youssef Squali also weighed in on Facebook on July 1, reiterating a Buy rating on the stock and raised his price target from $92 to $100. The analyst raised his price target to “reflect the growing shift of ad dollars online, mobile usage and Facebook’s fresh suite of mobile-first ad offerings.”
In addition, the analyst points out that “Global Internet advertising spend is expected to grow at a 15% [compounded annual growth rate] over the next few years, and overtake TV as the largest medium by 2020.” He continues, “Given Facebook’s leading mobile capability ($2.4B of mobile ad revenue in 1Q) and massive scale,” Facebook should be the “key beneficiary” of the shift.
Squali’s analysis also observes that more than 20% of mobile user’s time is spent on Facebook and Instagram. He expects that Facebook should “continue to ride the mobile wave.”
Finally, Facebook’s leading “native mobile ad offering” is changing the industry and attracting more brand advertisers. Squali describes an advertisement for a watch in which“users could get a 360-degree view of a watch, which allows for closer inspection of an advertised product.” Essentially users can “interact with or manipulate an [advertisement] in a richer way.”
Youssef Squali currently has a +22.4% average return per stock recommendation.
Out of 34 analysts polled by TipRanks, 30 analysts are bullish on Facebook, 3 are neutral, and 1 is bearish. The average 12-month price target for Facebook is $97.42, marking a 13.58% potential upside from where the stock is currently trading. On average, the analyst consensus for Facebook is a Moderate Buy.