Facebook Inc. (FB) Stock Will Rise Above $175

• JP Morgan Analyst Doug Anmuth recently raised his target price for Facebook stock.
• This should come as a reassurance to investors following the recent controversy around video measurement metrics.
• Should investors follow the latest buy call? Is Facebook stock an attractive buy?

Facebook Inc. (NSDQ:FB) was recently in the news for the wrong reasons. The world’s second largest online ad market platform disclosed that the company was wrongly reporting a video metric on the platform for the last two years. With the disclosure, the company raised fears of scaring away ad publishers. However, recent reports by analysts claim that the publishers and ad sellers on the platform do not view the error as something major. Hence, the impact on Facebook’s momentum could be minimal.

In a separate news, JP Morgan analyst Doug Anmuth hiked his Facebook stock price target to $175, up from $150, which came as a reassurance for investors following the measurement error. But, can Facebook really deliver these gains? Can the firm outgrow its current valuations? Let’s understand by looking at the various parts of the Social media giant.

Also read: Facebook Inc. Stock Will Rise Above $150 Faster Than Many Think

Core Facebook Platform

To understand the value of the platform from a very high level, investors need to track 2 metrics: ARPU (Average Revenue Per User) and MAU (Monthly active users). Facebook closed the last quarter (Q2 2016) with MAU of 1.7B and an ARPU of $3.86/quarter or annualised ARPU of $15.44. Its noteworthy to point out that the two metrics have seen an uptick in growth over the last few quarters.

Facebook ARPU growth has never dipped below 23% over the last 10 years, while the MAU growth has always been above 12%. Going by the extension, it is fair to believe that the company can continue to grow on these metrics. While MAU growth will be driven by further penetration into the global internet user base, ARPU growth will be driven by the tailwind of a growing online ad market and also the growth in the number of advertisers (demand) on the platform.

Also read: Is Facebook Inc. Stock Really A Better Long-Term Play Than Apple Inc. Stock?

Assuming a 10% annual growth in the Facebook user base puts the 2020 MAU’s 2.28B, which is a reasonable estimate given that the number of global social network users is expected to near 3B in 2020. Coming to ARPU growth, assuming an average annual growth of 18% over the next 4 years (10 quarter avg is 33.5%) puts 2020 ARPU at $29.6, working off the annualised base of $15.28 as of Q2 2016 end. Based on these assumptions Facebook should be able to net $20.32B (30% margin) Net Income in 2020 on a top line of $67B. Using a 20X earnings multiple puts core Facebook platform value at $406.4 billion.

Messenger, Whatsapp and Instagram Valuation

The LINE IPO was the biggest IPO in 2016. LINE is currently valued at $10.77B with a user base of 220M, putting the per user value at nearly $49. Using a $30 per user (in line with conservatism) value puts the value of Whatsapp and FB messenger at $30B each.

We use Snapchat as a comparable for Instagram, given greater similarity in their use cases and the overlap in their target demographic (younger population). Snapchat, with 100M users was valued at $22B in March 2016, implying a per user value of $220, which we believe could be way too optimistic. Using a more conservative per user value of $100 puts Instagram value (500M MAU) at $50B.

Also read: Instagram On Track To Become A $5 Billion Money Spinner For Facebook Inc. (FB)

Facebook Stock SOTP Valuation

Using the values mentioned above, Facebook could be valued at $516.38B. This implies a per share price of $179, implying an upside of nearly 40% from the last traded price (Sep 29). Investors should note that these are based on very conservative estimates and exclude the impact of the Oculus and other AR/VR efforts of the company.

Summary

JP Morgan analyst Doug ANmuth recently raised his Facebook stock target price to $175 per share. Using an SOTP valuation, we throw some light on why the Facebook stock could rise above these levels as the company begins to monetize its other properties. Hence, the Facebook stock is a good buy for long term investors.