Noting its progress from mobile monetization and the introduction of revenue-generating products including real-time bidding exchange and gifts, the firm raised its long-term revenue and earnings estimates, increased its price target to $32 and reiterated its "Overweight" rating.
In the Morgan Stanley report, it addressed the following key points:
Increasing mobile usage benefits Facebook- The monetization gap that closed on desktop Internet will also shut on mobile Internet. Investors had initially been skeptical of Facebook Inc (NASDAQ:FB)'s mobile revenue opportunity, but now the company is on track to generate 20% or greater of advertising revenue from mobile in the fourth quarter of 2012, up from just 3% in the second quarter.
Mobile Newsfeed ads pricing have been modeled at a large premium to Facebook’s platform average. Eventually Newsfeed plus all mobile ad formats could comprise approximately 60% of total advertising revenue.
New initiatives could be accretive over time - Facebook appears to emphasize on-site initiatives including advertising products that more efficiently monetizes its inventory and eCommerce products, driving gift purchases via its platform. This could generate incremental revenue of more than $1 billion by 2015.
If Facebook Inc (NASDAQ:FB) can launch an external ad network this year and gain approximately 6% of market share annually, it could add another $0.7 billion in net revenue by 2015.
Estimate changes and valuation- From additional analysis and great confidence in Facebook’s Newsfeed and mobile advertising businesses, long-term revenue and earnings estimates will increase by 2% to 4%. For 2012/2013/2014 earnings per share, it has models of $0.52/$0.85/$1.15.
The 12-month DCF-driven price target will increase to $32 (from $31), equivalent to 12 times/9 times 2013/2014 revenue, 20 times/15 times EBITDA, and 38 times/28 times earnings per share against a revenue/EBITDA/EPS CAGRs of 26%/30%/29% from 2013 to 2016.
In addition, analysts also noted the following key investment positives and risks.
Key Investment positives:
- As the leading global social network, Facebook has a large and growing network of users and a huge database of self-disclosed interest and intent information that enables it to deliver socially-enabled ads with improved targeting and recall rates.
- From its developer platform, it enables app makers and web publishers to leverage the Social Graph to give immediate personalization to users and improved ad targeting for brands.
- Facebook Inc (NASDAQ:FB) has already gained strong profitability from estimates and will probably not be a cash taxpayer until either 2015 or 2016.
Key investment risks:
- Consolidated ad pricing is lower than its industry peers but there's the potential for a large upside due from Newsfeed ads. There is the risk that Facebook will be unable to achieve pricing leverage across trillions of annual ad impressions.
- The mobile ad market is still very young. There's a belief that Facebook will be the market leader for mobile ad targeting, agency and brand transitions to mobile, but it could take longer than expected.
- Facebook Inc (NASDAQ:FB) has to find a balance between information sharing that will allow it to deliver favorable ad targeting, but not anger either users or legislators who want increased privacy levels.
Facebook Inc (NASDAQ:FB) is currently trading up 5.38% at $28.05.