We are initiating coverage on
) with a Neutral recommendation over the long term (6-12 months)
and price target of $33.00.
Incorporated in 2004, Facebook became public on May 18, 2012.
The social networking pioneer offered 421 million shares to the
general public, representing a 15% float. Facebook priced its
Initial Public Offering (IPO) at $38.00 per share (approximately
100 times historical earnings as per Reuters) and finally raised
$6.84 billion as net proceeds.
Facebook's IPO has been severely criticized for mismanagement
and technical glitches that cost stock brokers and investors
millions of dollars. IPO experts opined that Facebook's sky-high
valuation was unjustified, primarily due to unproven monetization
efforts on the mobile platform, a slowing advertising growth rate
and not-so-impressive first quarter results for the quarter ended
March 31, 2012.
Although revenues surged 45.0% year over year to $1.06 billion,
Facebook reported earnings of 9 cents, which declined slightly from
11 cents reported in the year-ago quarter. The uncertainty behind
Facebook's IPO filing has resulted in a sharp decline in share
prices. Year-to-date, Facebook shares have declined 18.0% as
compared to a 5.9% increase in the S&P 500.
Despite enjoying a first mover's advantage in the social
networking market, we believe that increasing competition is the
primary headwind for Facebook over the long term. Besides
) Google+, Twitter, Orkut in its core markets, Facebook is also
fighting small regional platforms, which not only limit its
expansion opportunities but also hurt its profitability.
Facebook is facing significant competition in the display
advertising market from Google. Rising concerns over the
effectiveness of Facebook ads as compared to Google's AdSense has
been a headwind lately. As per eMarketer, Google is set to grab the
#1 position in the display market by the end of 2013. We believe
that Google's increasing popularity has the potential to limit
Facebook's ad revenue growth going forward.
Further, Facebook's popularity is based on the engaging apps
from its third party developers, particularly
). However, Zynga's narrow product portfolio has been primarily
blamed for a waning interest in social games on the platform.
Zynga's low-paying customer base and stiff competition from other
established players are also hurting its top-line. This does not
bode well for Facebook, as the company earns the majority of its
non-ad revenue from Zynga.
Apart from increasing competition, lack of visibility around
mobile monetization remains a concern. Although Facebook has made a
number of acquisitions (such as Snaptu, Instagram) to boost its
mobile offerings, we believe that lack of adequate ad coverage for
the mobile platform will hurt its revenue earning capacity going
Nevertheless, we believe that Facebook has immense growth
opportunities based on its huge & loyal customer base, talented
platform development team and engaging apps.
Facebook currently earns approximately 15.0% of its revenue from
non-ad sources, mainly from the sale of in-game items in the social
gaming apps of Zynga. As Facebook continues to gain scale and
expands into new horizons, we believe that the company will
increase its focus on improving monetization from other app
developers beside Zynga.
We believe that Facebook has significant growth opportunities
from increasing online advertising spending as compared to
traditional formats. Facebook's massive user base (around 900
million) and its ability to track personal details over time make
it a formidable force in the online ad market. Facebook can use
this massive database to help advertisers target relevant ads going
Currently, Facebook has a Zacks #3 Rank, which implies a Hold
rating over the short term (1-3 months).
FACEBOOK INC-A (FB): Free Stock Analysis Report
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