Wedbush Equity Research analysts Shyam Patil and Andy Cheng maintain an Outperform rating for Facebook Inc (NASDAQ:FB) as the tech company announce fourth quarter results.
Facebook delivered a strong revenue and EPS beat with year-over year advertising revenue growth accelerating 10 points from 3Q. We are reiterating our OUTPERFORM rating and raising our price target to $80 (from $72.50). We believe the company has multiple catalysts ahead, including the recently introduced video ads and Instagram monetization.
Facebook’s fourth quarter highlights
Facebook Inc (NASDAQ:FB)’s 4Q revenue of $2.59 billion (+63% y/y) was 10% above our and consensus estimates of $2.36 billion driven by strength in advertising (for both mobile and desktop). EPS of $0.30 was also 7%/11% above our/consensus estimates of $0.28/$0.27 on higher gross margins (+580 bps y/y) and EBIT margins (+1000 bps y/y).
Positives
1) Revenue upside was significant and advertising growth accelerated 10 points from a particularly strong 3Q; 2) Mobile exceeded $1 billion in revenue for the first time, growing 306% y/y (41% q/q), and crossed the 50% threshold to comprise 53% of total ad revenue; 3) Engagement continued to grow, with DAU/MAU increasing to 61.6% in 4Q from 61.2% in 3Q and growing sequentially in every geo except ROW; 4) Pricing for ads delivered increased 92% y/y (vs. +42% in 3Q) driven primarily by the mix-shift to newsfeed and validates management’s decision to limit ad load growth; 5) Margins came in substantially ahead of estimates, beating our EBIT margin estimates by 640 bps.
Items to note
1) Facebook Inc (NASDAQ:FB) expects non-GAAP opex to increase 40-45% y/y in 2014, as the company invests in technical headcount and product development. This is higher than our previous 32% y/y growth estimate, but we believe makes sense as Facebook is currently in growth mode. 2) Impressions declined 8% y/y, but primarily due to the shift to mobile where there is less ad real estate.
Estimates raised for 2014
We are raising our estimates. For 2014, our revenue/non-GAAP EPS estimates are $11.27 billion/$1.20 vs. $10.5 billion/$1.16 previously. We are establishing our 2015 revenue/non-GAAP EPS estimates of $15.5 billion/$1.64.
Valuation
Our $80 price target for Facebook Inc (NASDAQ:FB) is based on ~20x our 2015 EBITDA estimate of $9.35 billion, which we believe is appropriate given the company’s high growth and margin profile as well as the likelihood of continued upside from improving mobile monetization, video ads, and Instagram. Note that we have rolled our valuation to 2015 to arrive at our new 12-month price target.
