Facebook came out with earnings this week, and the reaction was somewhat farcical.
The stock exploded immediately on news of a strong earnings and revenue beat and a good outlook. Then all those gains evaporated on the conference call as the company admitted for the first time that teens were starting to cool on the site.
But still, the stock has gone on an incredible run, and now sits jut below $US50 per share.
So where’s next from here? Citi analyst Mark Mark came out with a note on Friday outlining how the company can get from where it is now to $US70/share, which would represent a 40% gain.
The potential gains for the company is summarized in this chart, which we’ll explain further below.
As you can see, Citi foresees Facebook growing its value by turning on various revenue drivers that don’t currently exist.
A big one is simply the company’s core CPMs. Right now, Facebook ads are worth less than other ads, and this is something that Citi believes the company will be able to rectify thanks to its superior data on its users. May writes: “In short, our analysis suggests that by assuming only a modest 2% 10-year eCPM CAGR leads to $US339mn, $US885mn and $US1.6bn in incremental revenue in CY14, CY15 and CY16, respectively”
Here are the other drivers:
- Instagram ads. Facebook hasn’t really started monetizing this monster asset, but the potential is big. Says May: “Instagram could drive $US80mn, $US348mn, and $US765mn in total incremental revenue in CY14, CY15 and CY16.”
- Facebook video ads. As with Instagram, there’s virtually nothing now, but this too could be good.
- Increasing the fill rate. May notes that on Facebook, about oune out of every 20 items in the newsfeed is an ad. It’s his belief that because there hasn’t been much pushback on the volume of ads currently served up, the number should be able to go higher.
- Launching an ad network. Facebook hasn’t yet launched, or even talked about, an ad network on other sites that uses Facebook’s knowledge of users, but the potential is there. “Unlike the other potential upside drivers we discuss in this report, an ad network is not something Facebook management has explicitly discussed and it has a different margin structure and likely different ascribed multiple. That said, we’ve taken those and other factors into account and believe that a Facebook ad network could add an incremental $US109mm, $US263mm, and $US417mm in revenue upside to current estimates.”
So says Citi, turn on all these things, apply a reasonable valuation to these businesses, and in a few years you’re at $US70/share.
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