UBS Global Research analysts Eric J. Sheridan, Vishal J. Patel and Timothy E. Chiodo rate Facebook Inc (NASDAQ:FB) as a Buy as they run the company through a series of Q1 checks.
Q1 checks reflect continuing pricing strength
Our Q1 advertiser channel checks suggest that the pricing strength exhibited in Q4 (+92% YoY price-per-ad) has carried over into early 2014 and is likely sustainable for longer than our prior estimates had assumed. In particular, we note the improved quality of advertisers & increased frequency of higher CPM formats (mobile app ads in particular) within the existing ad load. We also point to an Ogilvy study highlighting declines in organic page reach (from ~12% in Oct to ~6% in Feb), which we believe is acting as an impetus for greater ad spend as brand advertisers seek to maintain their audience – outsized ROIs on FB are more than sufficient to justify this greater spend.
Recent advertising deals show traction with brands
Facebook Inc (NASDAQ:FB) is gaining increased traction with brands, who view the platform as a means to buy audience/reach (based on our conversations). In particular, we highlight the global partnership announced by Mondelez International – the agreement covers 52 countries & includes a joint commitment to innovation, opportunities to opt into Facebook’s beta-testing programs, access to research and capability building through immersion days in priority markets. Separately, AdAge reports that Omnicom has signed a $100mm deal to roll out paid advertising on Instagram on behalf of its brand clients. That said, we believe our estimates are achievable without a meaningful contribution from Instagram or auto-play video ads.
Increased operating estimates partially offset by dilution
Our new FY14 ests are revs $11.9b (from $11.1b); Adj. EBITDA $7.4b (from $6.8b), Adj. EPS $1.25 (from $1.27). Our new FY15 ests are now revs $16.0b (from $14.0b); Adj. EBITDA $10.2b (from $8.6b), Adj. EPS $1.80 (from $1.67).
Facebook’s valuation
Our $90 price target (prior: $72) for Facebook Inc (NASDAQ:FB) is based on our weighted avg. framework (EV/Sales, EV/EBITDA, EV/FCF) based on our ’13-’15 ests. Our ests do not reflect revenue & EBITDA from WhatsApp (as the deal has not closed) but account for the expected share count dilution – an approach we consider conservative.
