How does a company worth $60 billion manage to completely
shock investors and deliver a 25% one-daygain ? That's the
question being asked at traders' desks across the country after
Facebook delivered a rock-solid second quarter that exceeded the
mostbullish of forecasts.
The answer is simple. Facebook, despite its massive size, had
largely been forgotten by most investors. Earlier this month, I
noted how this once-hotIPO had been steadily falling this past
spring, even as the rest of themarket was in party
Suddenly, thisstock is touching 52-week highs again, and if
you were savvy enough to own this stock going into the quarter,
then this is no time to be a seller. After a quick move to $33,
this stock may be headed toward the $40 mark byyear 's end.
The Great Second Quarter
Facebook's impressive second-quarter results have been discussed
in many other forums, so I'll only recap the key metrics
- Strong advertisingrevenue (up 63% from a year ago
(excludingcurrency impacts) compared with a 41% year-over-year
jump in this year's first quarter) highlights the company's
rapidly increasing ability tomonetize its massive user
- Thatmonetization , which surged 26% from a year ago to
$1.60 per user, is now the highest in the social media
landscape. That figure stood at $1.35 just three months
- Facebook's daily average users, as a percentage of monthly
active users, rose to 61% in the second quarter from the
previous quarter, reversing recent declines. That rebuts
concerns that consumers have grown tired of daily
- Mobile adrevenues of $657 million were almost 50% above
consensus forecasts. The entireanalyst community simply didn't
see this coming.
- Facebook generated more than $1 billion in quarterlyEBITDA
(earnings before interest,taxes ,depreciation andamortization )
for the first time in its history. The most bullishWall Street
analysts expected EBITDA of around $900 million.
Yet as solid as those numbers are, they don't explain why this
stock still has considerableupside . In my recommendation of
Facebook earlier this month, I discussed the management
initiatives that are still in their infancy and not yet
significantly contributing to financial results. For example, the
company's purchase of Instagram -- which now has more than 130
million active users -- continues to look like a master stroke,
as that division's user growth shows no signs of cooling.
Facebook management has moved slowly to monetize Instagram's
user base, wisely preferring to let it grow as large as possible
before shifting the platform toward ads. It's a transition that
Facebook users now accept, and Instagram userswill slowly be
weaned into advertising in a similar fashion.
Another growth initiative to monitor: video advertising.
Facebook concedes that advertisers are clamoring for more video
display ad opportunities and this is likely to be a key focus for
management over the next six months. (In the third point I made
in my look at the stock a few weeks ago, I also highlighted many
other mini-platforms that Facebook is developing.)
The other key trend is very impressivecapital management.
Facebook's IT team is becoming so much more adept in its hardware
and software purchasing that the company was able to pursue all
of its growth initiatives with just $268 million in capital
spending. That's more than $100 million below consensus
||After a rocky start, Facebook's stock is now touching
52-week highs, and may be headed toward the $40 mark by
Surging revenues and controlled expenses will set the stage
for Facebook to post some of the most impressiveoperating margin
profiles of any major tech company. Merrill Lynch believes
thatfree cash flow will exceed $2.5 billion by 2015, up from just
$53 million last year. Projected EBITDA of $7.4 billion in 2015
would be roughly triple the EBITDA generated in 2012.
Wall Street Sees The Light
Wall Street analysts, who tend to move as a herd, have been
suddenly boosting target prices at a feverish clip. Here's a
- Merrill Lynch's target goes from $35 to $40, boosting 2014
and 2015 forwardEPS and revenue targets by 20% to 40%.
- UBS'price target was raised from $30 to $36, suggesting
that "there will be upward pressure on advertiser budgets
allocated to Facebook as the company improves its ability to
demonstrate the (returns oninvestment ) achievable on its
- TopekaCapital Markets seesshares rising to $40, thanks to
"several well defined catalysts over the next two years
including monetizing Instagram, launch of auto-play video ads
... and a bigger push into e-commerce."
- Jefferies' target price goes from $32 to $37, predicting
that Facebook will finish the year on a very strongnote as
current initiatives ripen.
- JMP Securities upgraded itsrating from "market perform " to
"market outperform." Its new $38 price target is based on the
belief that "Facebook has discovered the formula to begin
significantly extracting value from its 1.16 billion global
- Cantor Fitzgerald bumped its price target from $35 to $40,
as "the valuation remains compelling for a company growing
revenues at 40-plus percent and EBITDA margins at 55-plus
- J.P. Morgan has a Street-high $44 price target, suggesting
that the just-released second-quarter results "could be
thesis-changing for many."
Why should you care about these analysts' price target and
views? Because Facebook is about to become a major topic of
conversation among these analysts and theirhedge fund clients.
Analysts tend to "talk up a name" as long as its current price is
a reasonable distance from its target price.
Risks to Consider:
There are a few negatives to the Facebook story. First, the
games category continues to underwhelm and is becoming a
decreasing part of thesales mix. Second, Facebook's "Graph
Search" feature, which was the product of a considerable amount
of R&D spending, has not yet become a hit with consumers. And
thanks to a rebounding stock price, Facebook could soon be hit by
a brain drain as valuable employeescash in theirstock options and
migrate to smaller, pre-public tech companies where other options
Action to Take -->
Shares of Facebook are hitting fresh 52-week highs but
remain well below the IPO price. The company burned alot of
bridges with lackluster quarterly results in 2012. Yet it's
increasingly clear that management now understands the need to
deliver solid financial metrics both now and in the future. That
said, it's the probable growth in 2014 and 2015 that should
really have you focused on this stock. This week's sharp run for
the stock reflects the fresh set of quarterly results -- but the
nextleg of share priceappreciation will come from even
betterquarters yet to come.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.