JP MORGAN: Facebook's Mobile Business Isn't As Bad As You Think

David Ebersman FacebookFacebook CFO David Ebersman

Photo: By Justin Sullivan/Getty Images

The big investment banks are out out with their initial ratings on Facebook.We’re gathering them all up today. Check here to see the investment banks’ research as we get it.

So far, we have Doug Anmuth of J.P. Morgan’s note. He rates Facebook “overweight” and gives it a year-end 2013 price target of $45. (J.P. Morgan was a co-lead on the IPO.)

He calls Facebook the “social infrastructure of the web” and lays out three key reasons to be bullish:

  • Facebook ad platform growing stronger. While Street focus is likely on the shift toward mobile usage, we point out that Facebook’s advertising platform is also in the midst of an important transition—ads are becoming more social, they are more prevalent in the News Feed, and the Facebook Ad Exchange should increase advertiser demand and inventory yield.
  • Early feedback on Sponsored Stories is positive. Based on our checks we are increasingly bullish on Sponsored Stories in the News Feed on both desktop and mobile. Early data suggests click-through rates and eCPMs for both are several times those of Facebook’s traditional desktop ads.
  • Mobile monetization may be better than people expect. Facebook likely will continue to roll out mobile ads in a measured manner going forward, but we believe Sponsored Stories in the mobile News Feed have been turned on more in just the past few weeks and initial results appear positive. Our analysis suggests mobile could become a $300M-$500M quarterly revenue opportunity for Facebook in the next 2-4 quarters as higher pricing and visit frequency offset fewer overall impressions.

As for the nitty gritty details on what Anmuth expects from the business:

  • We expect growth to trough in 2Q and reaccelerate in 2H12 and into 2013. We project 2Q12 revenue of $1.1B (+24% Y/Y) and EBITDA of $587M (+6%, 53.1% margin), but we expect revenue to reaccelerate and margins to expand modestly Q/Q in the back half driven largely by continued solid user growth and newer ad formats. We project 2012-2015 three-year CAGRs of 33% for revenue and 35% for EBITDA.
  • Overweight rating and $45 PT. Our year-end 2013 price target of $45 is based on an average of two methodologies: 1) 17x 2014E EBITDA of $5.0B which yields $39; and 2) our DCF analysis utilising a 3% terminal growth rate and an 11% WACC which yields $51.

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