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Facebook is only eight years old and it’s already the biggest display ad company in the world.You’d be a fool to pass on a company like that, says Nomura analyst Brian Nowak in a new note. He has a $40 price target on the company.
Here is Nowak’s explanation:
Unparalleled Reach and “Social” Leadership Make Facebook a Winner in Display
FB reaches 55% of people online worldwide and is increasingly becoming synonymous with social networking—now the largest category of time spent online. This reach and dominant social position should enable it to continue to attract advertiser dollars, as we expect FB’s global advertising revenue to grow at a 21% CAGR from 2011 to 2016, growing from 8% to 13% share of the display market.
Near-Term Monetization Issues, but Large Long-Term Opportunities
FB’s low (and unmeasurable) current advertising ROI is hindering growth reacceleration, but it is important to remember that the company’s monetization is still in its infancy and continues evolving. Our analysis of three opportunities—charging for branded pages, improved FB advertising units, and mobile—highlights the long-term optionality for substantial earnings upside. To wit, even one strategic change—charging for branded pages—would, in our view, nearly double FB’s long-term revenue opportunity and drive 2014 EBITDA 76% higher than our current estimate and 48% above the Street forecast.
Initiating at Buy and $40 TP
We are initiating 12% below the 2013 Street EPS estimate, but current consensus is somewhat misleading due to the temporary lack of the underwriting banks’ estimates. In addition, we believe that focus will be more around steps toward improving long-term top- line growth than near-term earnings estimates. FB sentiment remains uncertain, as it has underperformed the market by 2,800bps in the five weeks since going public, and, despite our below-Street earnings estimates, we value the stock at $40, 25% above current levels. We value FB at 16.5x our 2014E EBITDA (weighted average of our bear/base/bull cases), based on a time-adjusted discount to Google’s EV/EBITDA multiple when it was the same age as FB (and long-term search monetization was still uncertain).
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