The firm maintained its “Overweight” rating on FB and lifted its price target from $150 to $160, citing the company’s recent user, engagement, ad pricing, and ad load trends show that suggest potential 6% and 10% 2017 revenue and EPS upside compared to analyst estimates.
Long term, Morgan Stanley’s bull case on Facebook is $200, while its bear case is $100.
Analyst Brian Nowak said in a note to clients:
“Ad load (measured as ads/DAU/hour) has been a material growth driver – we estimate ad load will drive ~32% of FB’s ’16 ad revenue growth. And we’re modeling this to slow – so as not to jeopardize user experience – expecting ads/DAU/hour to grow by 8% in ’17 (vs. 15% in ’16). Even this deceleration could prove overly conservative given the potential for other platforms with lower ad load levels – Instagram, Messenger, and FAN – to start contributing more.”
Nowak isn’t concerned about ad saturation worries. Instead, he sees big opportunity for ad upside, given strong engagement trends:
“But ad load is only one factor driving FB, as its scale (1.1bn DAUs, up 17% Y/Y in 2Q:16) and strong engagement (each DAU spending 51 minutes/day across Facebook, Instagram, and Messenger) are more important, together driving an estimated 57% of FB’s ’16 ad revenue growth. FB’s growing base of engaged users gives it more ad impression opportunities and data to serve higher quality ads. Recent strong DAU and engagement trends cause us to sharpen our forecasts, and we are raising our ’17 DAU estimates by 22mn (1%) and fully incorporating time spent per DAU – now modeling it to rise 5% in ‘17 (from 11% in ’16). Note this deceleration could be overly conservative too if product innovation continues to expand FB’s use case.”
Finally, Nowak sees significant upside for ad pricing gains:
“We believe advertiser demand for FB remains strong and that ad unit pricing – determined in FB’s advertiser auction – has room to head higher for 2 reasons. Firstly, there is a continued mix-shift toward new, higher-priced and better performing ad units like Canvas ads, Dynamic ads, and video. Secondly, FB’s scale has kept effective pricing low vs. other traditional and online offerings (we estimate a 70%-80% discount), meaning there is room for like-for-like CPM increases (over time) as demand growth outpaces supply. As such, we believe average unit pricing will continue to rise, modeling 11% growth in ’17.”
Facebook shares rose $0.87 (+0.67%) to $130.60 in morning trading today. FB has now gained 24.77% year-to-date, more than tripling the S&P 500’s return in the same period.