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Facebook, Inc. Stock Slides As “Watch” Video Tab Impact Is Estimated

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Friday looks to be another losing day for Facebook, Inc. (NASDAQ:FB) stock as Wall Street treads with caution across most of the equity market. Like on Wednesday, several high flyers were in the red, with Facebook, Apple, Netflix and other big tech names skidding and pulling the S&P 500 and Nasdaq Composite into the red, even as analysts attempted to rescue them.

Facebook stock a top pick in Internet

In a note on Friday, JPMorgan analyst Doug Anmuth said that Facebook stock was one of his two top ideas in Internet going into 2018, with Netflix stock being the other. He has a $225 price target on Facebook stock and noted that the company has been steady in delivering strong growth in ad revenues and “significant number revisions” this year. He highlighted Instagram as an area with “significant headroom” for user growth and monetization.

On Thursday, MKM Partners analyst Rob Sanderson raised his price target for Facebook stock from $200 to $240, which is the highest among the analysts reporting their models to FactSet. He sees the setup for Facebook stock as “the best among mega-caps at the moment.”

He believes the consensus is estimating “overly conservative” deceleration in topline growth. He also thinks the consensus appears to expect an “overly aggressive” ramp in expenses, and he believes Facebook stock already reflects “a material slow-down with significant decoupling of P/E and revenue growth.”

Original video content is the future

Facebook management has spooked investors more than once by signaling that they’re preparing to invest in new technology or features, and one area that’s been under development for quite some time is video. The company announced the Facebook Watch tab over the summer, and Morgan Stanley analyst Brian Nowak offered analysis of the size of investment that may be required and the potential payoff from it.

Facebook Watch includes both shorter and longer-form videos, and next year the company is expected to spend hundreds of millions of dollars on original video content for the Watch tab. It’s Facebook’s participation in the growing trend of tech companies producing their own content.

Estimating Facebook Watch impacts

For Nowak’s base case, he pegs Facebook’s original content investment at $200 million for 15 longer-form series with 12 episodes apiece and 100 shorter-form series, also with 12 episodes each. He expects the social media form to monetize these videos using mid-roll ads, noting that Facebook is giving its content creators 55% of the ad revenue it earns on their shows.

He expects Facebook to recoup whatever it invested in content initially before starting its revenue sharing program. He also expects the company to keep full ownership of some series, along with 100% of the ad revenue from them. He pegs 2018 Watch video revenue at $565 million for 2018 with $400 million in video spend. He also estimates Watch use at about 6% of total minutes spent on Facebook, or 20 minutes per daily active user in North America per day, which he adds is still much lower than the amount of daily video consumption on more established platforms.

Facebook stock declined by as much as 0.95% to $175.49 in intraday trading on Friday.

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