I am lowering my price target for Facebook (FB) to $25 from $29 in the wake of Q2 earnings result. I remain Equal Weight on the stock due to near-term uncertainties.
My key concerns are:
- Faster than expected transition from desktop to mobile engagement
- Overall engagement level throughout the four key geographic regions seem to be hitting a ceiling
- Slower than expected adoption of social media advertising which creates a minor headwind to topline growth
To see my investment thesis on Facebook, please refer to my June 25th initiation note titled "Facebook: Compelling Growth, But Fairly Valued."
Key assumptions in my models are:
- Advertising revenue CAGR of 25% from 2012 to 2015, and 12% from 2015 to 2018, given the lack of visibility with mobile monetization
- Daily engagement to reach 62% in 2015 from the current 58%, and steadily rises to 68% by 2022
- Payment revenue CAGR of 16% from 2012 to 2015, and 9% from 2015 to 2018, given the uncertainty surrounding Zynga's (ZNGA) ability to introduce blockbuster titles
- Net revenue CAGR of 24% from 2012 to 2015, and 12% in the subsequent four years
- Gross margin: 78%
- Sales and marketing as percentage of revenue: 11%
- R&D expense as percentage of revenue: 10%
- G&A expense as percentage of revenue: decline linearly from 14% in 2012 to 7% by 2022