Facebook Has 26% Upside: Morgan Stanley Raises Price Target To $160

Even if Facebook Inc FB were to witness a ~50 percent slowdown in ad load growth, the platform’s user, engagement and ad pricing trends suggest upside to the 2017 consensus estimates, Morgan Stanley’s Brian Nowak said in a report.

He maintained an Overweight rating on the company, while raising the price target from $150 to $160.

Facebook’s shares have been under pressure on investor concerns over an ad load growth slowdown in the back half of 2017 resulting in a significant revenue deceleration. Shares are now trading almost 40 percent below their median relative P/E multiple.

Related Link: Facebook Investor Concerns Over Growth Are 'Overblown'

Nowak mentioned, however, that even with a material slowdown in ad load growth, Facebook’s user, engagement, and ad pricing growth should enable to company to beat the 2017 Street revenue and adjusted EPS estimates by 6 percent and 10 percent, respectively.

Ad Load Is Only One Factor

Although ad growth would likely decelerate, it is only one factor driving the company’s performance, Nowak noted. He cited the more important factors as:

1. Scale: 1.1 billion DAUs, up 17 percent year-over-year in 2Q16
2. Engagement: Each DAU spending 51 minutes per day across Facebook, Instagram, and Messenger

“FB's growing base of engaged users gives it more ad impression opportunities and data to serve higher quality ads,” the analyst wrote. He added that advertiser demand for Facebook remains strong and ad unit pricing has “room to grow.”

Upside

These trends could result in 44 percent ad growth in 2017, versus the Street’s estimate of ~36 percent, even with a significant slowdown in ad load growth. “We see 26% upside and view FB as our top pick in online advertising,” Nowak stated.

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