Thursday, April 24, 2014

FB: Another impressive quarter, but ad revenue growth may slow down a bit ...

Facebook (FB) once again beat expectations.  The Company's Q1 top and bottom-line came in well ahead of our estimates and the Street's.  The stock was trading up 3% in AH, and will likely have a good day on Thursday.

It appears that us adjusting our estimates and the valuation of FB higher is becoming the 'norm'.  We note that with all the good news, management stated Y/Y ad revenue growth will not be as high going forward.  It believes that Q2 Y/Y growth will be lower than what we saw in Q1, and the rest of the year will be "meaningfully lower".  It appears that mobile ARPU, driven by mobile ad pricing, will not be spiking as high as we have seen the last 3 quarters.  We have been expecting this, but unfortunately were expecting it to occur a bit earlier.  However, combined with the slowdown in MAU growth, not only in the 'mature' North American market, but also in Europe and Asia, maybe our 'mere' 40% and 37% Y/Y growth assumptions for FY '14 ad and total revenues are not too pessimistic.  

We're now valuing FB at $33.23/sh, much higher than the $28.39 we gave it after Q4 '14, and remains significantly below where the stock closed at on Wednesday and where most analysts value it at.  We note that at the last closing price, $61.36, FB is trading at 27x and 14x FY '14 adj. EBITDA and revenues, respectively.  It is trading at 13x the Street's total revenue estimate for FY '14.  Our DCF valuation represents a 14 forward EV/EBITDA.  We remain positive regarding FB's services, as we mentioned in our initial post on the Company; however, we continue to think the stock is overvalued.

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