Cantor Fitzgerald analysts Youssef Squali, Naved Khan and Kip Paulson reiterate Buy ratings for Facebook Inc (NASDAQ:FB).

Facebook

We’re reiterating our Buy rating following checks that show that engagement in October and November remained strong and that ad intensity has increased throughout the all-important Holiday period. Consequently, we’re tweaking our 4Q:13 and FY:14 estimates and increasing our PT to $65 from $63.

Raising ad revenue estimates for Facebook

Recent observations indicate that the ad load has picked up significantly during the Holiday season to ~10% vs. ~5% reported in 3Q:13. We saw a similar spike in 4Q:12, but this year’s increase seems more amplified with bigger brands and a greater mix of higher-priced click-to-play video ads. As such, for 4Q:13 we’re slightly raising our overall ad revenue estimate to $2,183M (+64.2% Y/Y) from $2,106M and raising our mobile ad revenue estimate to $1,206M, from $1,165M, mainly on higher ad pricing.

Testing of auto-play video ads

Last Tuesday, Facebook Inc (NASDAQ:FB) announced that some users would begin seeing auto-play video ads for a new upcoming film called Divergent. The ads will only play automatically if the user is connected to wifi and will not have sound (unless the user clicks on them). User engagement remains a primary driver of growth and, as such, striking a balance between user experience and ad intensity is paramount, we believe. That said, we view this development positively as this targeted, relevant, and nonintrusive ad format should be popular with advertisers looking for accountable mass-reach branding opportunities.

Facebook mobile usage increased

Time spent on all mobile devices (smartphones + tablets) increased an impressive 5.2% M/M to 100.7B minutes (+3.4% M/M on a per visitor basis), while smartphone usage increased 46.6% Y/Y to 85.9B minutes (+39.8% Y/Y per visitor), according to comScore’s November Mobile Metrix data (no Y/Y comp for tablet data, which began in Feb.). The sequential per visitor time spent performance is particularly strong compared to peers: Google Inc (NASDAQ:GOOG) (-1.8% M/M), Yahoo! Inc. (NASDAQ:YHOO) (-10.9% M/M), AOL, Inc. (NYSE:AOL) (-11.8% M/M), and LinkedIn Corp (NYSE:LNKD) (-22.5% M/M). Only Twitter Inc (NYSE:TWTR)’s 7.3% M/M growth rate was better, and not unexpected, given Twitter’s smaller but faster growing platform.

Valuation and risks for Facebook

Facebook Inc (NASDAQ:FB) is trading at 11.7x revenue and 19.9x EBITDA on our FY:14 estimates, a valuation we still find compelling. Risks include deceleration in mobile monetization, failure to prove the effectiveness of Facebook’s ad units, and declines in user engagement.