Cit Research analysts Mark May and Kevin Allen rate Facebook Inc (NASDAQ:FB) as a Buy as they look at some key growth drivers for 2014.

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Facebook’s growth story

Since we published The Path to $70 report, some of the items we analyzed then have already begun to come to fruition (e.g., ads on Instagram, video ads on Facebook, etc.), and the company announced a major acquisition. With this report, we are revising our published estimates for Facebook to incorporate 1) the WhatsApp acquisition; 2) ads on Instagram; and, 3) video ads on Facebook. As a result of these changes, we are increasing our 12-month target to $85 from $70 and continue to view Facebook Inc (NASDAQ:FB) as the best growth story in the Internet sector.

Changes in Facebook’s valuation

As detailed in this report, we have made the following changes to our model and valuation framework for Facebook Inc (NASDAQ:FB): 1) have incorporated the WhatsApp consideration ($4bn cash, 229.8mn shares) into our estimates as of 3Q14; 2) have incorporated a current fair value estimate for WhatsApp of $17bn into our SOTP valuation ($6/sh), which assumes among other things it reaches 900mn MAUs and $2 rev/MAU in CY15; 3) have incorporated the ad monetization of Instagram into our SOTP valuation, which assumes Instagram revenue grows from $174mn in CY14 to $2.3bn in CY18 and has a current fair value of $19bn (or $7/sh); and, 4) have incorporated conservative assumptions for the roll-out of video ads on core Facebook (which, we estimate, will contribute net incremental revenue of $261mn in CY14 and $1.6bn in CY18, and adds $6/sh to our 12-mo price target).

Growth drivers for 2014

We believe Facebook Inc (NASDAQ:FB)’s key themes and growth drivers in 2014 will include 1) continued RPM (revenue per thousand ad impressions, or monetization) gains due to the mix shift toward higher valued News Feed ads and from increases in like-for-like ads from improved targeting & analytics; 2) continued growth in mobile app adds as installs remain in high demand and adoption of app engagement ads; 3) monetization of Instagram (e.g., see recent $100mn contract with Omnicom); and 4) wider rollout of video ads on Facebook and Instagram, which we believe could have 2x-plus eCPMs than standard ads.