UBS analyst Eric J. Sheridan and his team say Facebook’s stock — currently trading around $US70 — is like a “snowball” that could hit a staggering $US112 in the future.
Facebook stock is already up 32% this year and has been trading in a frothy region above the average of analysts’ price targets, according to Bloomberg. FB has rallied so quickly that analysts have struggled to upgrade their ever-higher price targets. Facebook stock at $US70 has a price/earnings ratio of 114, compared with the average S&P 500 PE ratio of about 16.5, according to Factset. So we’re entering the stratosphere of valuations here.
In a note to investors titled “The Snowball Picks Up Speed,” UBS’ Sheridan, Vishal Patel and Timothy Chiodo point to several factors they think will drive Facebook’s stock into triple digits in the near future. (UBS actually has a $US90 price target with an “upside scenario” of $US112.)
First, Sheridan says that Facebook has restricted the “reach” of posts on advertisers’ Facebook pages so that just 6% of their followers see any given post. This “is acting as an impetus for greater ad spend as brand advertisers seek to maintain their audience.” Facebook has previously denied that it restricts the reach of brands’ pages on Facebook. Rather, it believes, the algorithm that controls which posts you see in your news feed is biased toward the posts that your friends also like and toward useful, newsy content.
Second, Facebook did a $US100 million ad-buying deal with Publicis Omnicom Group, the giant ad agency holding company.
Third, Sheridan says that despite its reputation, Facebook still remains relatively ad-free:
We believe FB remains undermonetized relative to peers given the time spent on the platform, providing an opportunity for continued strong revenue growth as monetization improves. In particular, Facebook ads exhibit strong pricing power (+92% YoY in Q4) and ROIs remain excellent for FB’s advertising partners, suggesting significant runway for rising ad prices.
Sheridan also believes payment revenue from WhatsApp — users must pay $US1 per year after their first year of usage — will help.
UBS has a downside scenario, too, of course. If the snowball melts, the stock would be worth only $US55, Sheridan writes.
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