Can Facebook Continue To Grow Ad Business? In A Word, Yes

Since late 2016, Facebook Inc FB investors have increasingly debated the sustainability of Facebook's advertising and overall revenue growth over the medium term. But, UBS is bullish on the company's prospects to increase its ad revenues in the medium term.

Analyst Eric Sheridan expects Facebook to increase its ad revenues at about 28 percent over the next three years, driven primarily by Instagram. Sheridan’s channel checks suggest other key drivers being video and eCommerce.

Facebook remains among the best positioned companies to capitalize on the continued shift in ad spending from TV to digital platforms.

“Specifically, we believe the secular shift towards mobile advertising, growth in users & engagement, and ad innovations (video Ads, Dynamic Ads, etc.) will drive FB's ad revenues over the next few years,” Sheridan wrote in a note.

As a result, the analyst expects video ads revenue to grow significantly over the next few years, accounting for about 18 percent of total advertising revenues in 2019.

Consequently, the analyst raised his Facebook advertising revenue growth estimate by about 2 percent in 2017 to $36.8 billion and about 5 percent in 2018 to $46.8 billion.

Accordingly, Sheridan now expects $31.49 billion of core Facebook ad revenue in 2017 and $39.32 billion in 2018. The analyst also raised his Instagram revenue estimates to $4.25 billion and $5.89 billion in FY2017 and FY2018, respectively.

EBITDA Margins, Emerging Businesses

In addition, Sheridan noted that the social media giant could “possibly” maintain flattish EBITDA margins despite high levels of opex growth over the next 2-3 years.

Sheridan is also constructive on the long-term potential of Facebook's emerging businesses such as Messenger, WhatsApp and Oculus, given their alignment with themes like mobile messaging and next-gen hardware.

“We continue to see FB as a core large cap Internet holding for strong revenue growth at reasonable valuation multiples against 2-3 year growth,” Sheridan added.

Sheridan maintained his Buy rating on Facebook and raised the price target by $10 $165.

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