Analyst: Huge Upside for Facebook Inc

Facebook Inc (NASDAQ:FB) stock is up nearly seven percent for the year. That doesn’t sound like much, but it’s pretty decent considering that the market dragged down most tech stocks earlier this year, putting them into negative territory. FB stock was no exception. However, now that fear in the market has mostly subsided, FB stock could continue its growth path. According to one analyst, Facebook’s growth has the potential to send FB stock soaring.

On April 11, Pivotal Research analyst Brian Wieser reiterated his “Buy” rating on shares of Facebook and raised his price target from $136.00 to $154.00. (Source: “Facebook’s stock given 40% upside potential ahead of earnings,” MarketWatch, April 11, 2016.) That implies a 40% upside in FB stock from Monday’s closing price.

“Facebook continues to grow with propulsion from several engines of growth,” said Wieser. (Source: Ibid.)

So what will get FB stock to Wieser’s price target? Let’s take a look.




Advertising

In his note, Wieser compared Facebook to Alphabet Inc (NASDAQ:GOOG), though he prefers the social media giant.

“We continue to view Facebook much more positively than Alphabet overall,” Wieser said. “Although Facebook and Alphabet’s Google are co-dominant players in global digital advertising, Facebook’s focus on their core business and its future evolution separates the company from its larger peer’s parent.” (Source: Ibid.)

Advertising, for the moment, is Facebook’s bread and butter. Ad revenue accounts for 96.5% of the company’s total sales with “payments and other fees” comprising the rest. (Source: “Facebook Reports Fourth Quarter and Full Year 2015 Results,” Facebook Inc, January 27, 2016.)

Facebook’s ad revenue is also still seeing explosive growth. In the latest quarter, ad revenue increased 57% over the previous year. (Source: Ibid.) To see how impressive that growth rate is, take a look at Google. Google’s ad revenue increased “only” 17% in the company’s latest quarter over the previous year. (Source: “Alphabet Announces Fourth Quarter and Fiscal Year 2015 Results,” Alphabet Inc, February 1, 2016.) So from an ad growth perspective, Facebook is well ahead of Google.

And it’s no wonder. Facebook’s massive userbase is an advertiser’s dream, and it’s still rapidly growing. The social service platform now boasts 1.59 billion monthly active users (MAUs) as of December 2015, up 14% over the previous year. (Source: Ibid.)

Live Video

Of course, sustaining such high ad growth rates is nearly impossible over the long term, but Facebook CEO Mark Zuckerberg plans to offset that deceleration with “Facebook Live.”

According to internal sources, Zuckerberg is “obsessed” with video and he has been redirecting internal resources to focus on Live, the company’s streaming video service that lets people broadcast video to friends on the site. (Source: “Mark Zuckerberg Is ‘Obsessed’ With Livestreaming, Making Live a Top Priority at Facebook,” Re/code, February 26, 2016.)

Facebook rolled out Live last summer and initially only let celebrities broadcast live streaming videos onto users’ feeds. That restriction was recently lifted, as Live is now available to all U.S. “iOS” and “Android” users.

Facebook says that users watch live broadcasts three times longer than recorded video. (Source: “Facebook Exec Clears the Air Over NFL, Celeb Deal Talks for Live-Stream Push,” Variety, March 7, 2016.) That will be a boon to Facebook’s ad revenue, as live video will increase the potential to serve up more advertising space for more ad dollars.

Online video advertising is also growing rapidly and Facebook is trying to take advantage of the growth with Live. Research firm eMarketer estimates that online video ad sales will reach $14.77 billion in 2019, up significantly from the $7.5 billion in 2015. (Source: “US Digital Display Ad Spending to Surpass Search Ad Spending in 2016,” eMarketer, January 11, 2016.)

Oculus Rift

Facebook is betting big on virtual reality (VR), which has the potential for a large payoff over the next few years. Facebook acquired VR headset-maker Oculus VR in 2014 for $2.0 billion. Under Facebook, Oculus released the “Oculus Rift” headset just a few weeks ago.

So far, reviews have been mostly positive, which bodes well for FB stock. Facebook expects to ship up to 600,000 units of the Oculus Rift by the end of the year, with sales expected to come in around $400 million, according to Cantor Fitzgerald analyst Youssef Squali. (Source: “Facebook Will Turn Oculus Rift’s Revenue Potential Into Reality, Analysts Say,” TheStreet.com, March 31, 2016.) While that’s only a small fraction of Facebook’s total revenue, the Rift will undoubtedly be huge over the next few years as user adoption accelerates.

In the next year alone, Squali forecasts Oculus Rift revenue will quadruple to $1.6 billion; by 2020, he pegs that number at $7.0 billion, with approximately 11 million units sold. (Source: “Facebook Could Make $7B in Virtual Reality Revenue in 2020,” Says Cantor,” Barron’s, March 31, 2016.) At a forecast of $7.0 billion in revenue, the headset could account for 10% of Facebook’s total revenue.

Virtual reality is about to take off and Facebook will be right there to capture the explosive growth.

The Bottom Line on Facebook Stock

Facebook has quite a few catalysts that shouldn’t make it too difficult for FB stock to reach Wieser’s $154.00 price target over the next few years. With advertising still growing at a rapid rate, Facebook Live just getting off the ground, and virtual reality about to take off, FB stock looks poised to run higher.