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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:

  1. Faster than expected transition from desktop to mobile engagement
  2. Overall engagement level throughout the four key geographic regions seem to be hitting a ceiling
  3. 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

(click to enlarge)

Source: Facebook Model Update: Lowering Price Target; Remain 'Equal Weight'