Meta Platforms Inc (META)

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MW Facebook investors sore, but 29 analysts adore it more than day before

Jul 30, 2015 13:52:00 (ET)


By Jennifer Booton, MarketWatch

Piper Jaffray raises stock target to $146 on virtual reality potential

Facebook Inc.'s stock fell Thursday after the company reported ballooning expenses and warned of a potential slowdown in mobile ad revenue, but a majority of analysts think the social network is worth more after its earnings report.

The stock began ticking lower late Wednesday after Facebook Chief Financial Officer Dave Wehner took the phone during the company's earnings conference call and warned that advertising revenue would likely slow in the third and fourth quarters of 2015.

"Since the first quarter of 2014, we have seen year-over-year advertising revenue growth rates decline each subsequent quarter," he said. "We expect this trend to continue."

But 29 analysts raised their 12-month price targets on Facebook (FB) Thursday morning anyway, according to FactSet, citing strong user growth, ad revenue and plans to rein in spending in the second-half of 2015 after an 82% jump in GAAP expenses in its most recent quarter.

"We would be buyers on any pullback," Piper Jaffray analyst Gene Munster said in a note to clients.

Recap: Facebook tops quarterly expectations despite soaring expenses (http://blogs.marketwatch.com/thetell/2015/07/29/live-blog-facebook-earnings-may-show-video-progress/)

Target increases came from Deutsche Bank, to $115 from $100; Goldman Sachs, to $110 from $102; Raymond James, to $115 from $110; Citigroup, to $112 from $97; Stifel Nicolaus, to $108 from $95; and Barclays, to $105 from $98. Piper Jaffray was the most bullish, raising its target by 22%, to $146 from $120.

There were no major upgrades of Facebook's stock as of Thursday afternoon, though the average rating among a poll of more than 40 analysts is already the equivalent to buy.

Shares of Facebook were last down 2.5% to $94.52. They remain up about 20% in the last three months, versus a 0.7% increase for the broader S&P 500.

Unlike some of its major competitors, Facebook's spending has been largely tied to research and development. In the second quarter, R&D spending jumped 175%, versus a 31% increase in cost of revenue, 64% increase in marketing and sales costs and 97% jump in general and administrative.

See Also: 5 mind-blowing predictions about the future from Mark Zuckerberg (http://www.marketwatch.com/story/5-mind-blowing-predictions-about-the-future-from-mark-zuckerberg-2015-07-01)

On the call with analysts, Facebook CEO Mark Zuckerberg said the company has been spending to improve the quality of the app, including investments in data centers, which he says have helped to reduce app crashes on iOS and Android by 30% and 40%, respectively. Other cash has been used to hire talent -- The company added nearly 900 employees in the quarter, increasing its workforce by 52% year-over-year to nearly 11,000.

In the future, spending will focus on monetizing Instagram (http://www.marketwatch.com/story/facebook-mulls-purchases-on-instagram-but-warily-2015-07-29) -- though Chief Operating Officer Sheryl Sandberg promised to tread carefully -- and continue innovating in virtual reality, with its Oculus Rift headset set to hit store shelves early next year.

Virtual reality is one reason why Piper Jaffray's Munster raised his target so far, saying he views Facebook as the leader in the emerging technology via Oculus, and the launch of the Rift as a catalyst for the stock near the end of this year.

See Also: Virtual reality is porn industry's billion-dollar new frontier (http://www.marketwatch.com/story/how-the-future-of-virtual-reality-depends-on-porn-2015-07-15)

"We believe that the [virtual reality] opportunity is largely underappreciated by investors," he wrote.

Meanwhile, Bank of America Merrill Lynch analyst Justin Post maintained a $105 price target on Facebook's stock and reiterated a buy rating, saying that while the quarter may have lacked the "big positive surprise factor" of prior quarters, the results suggest strong engagement.

"The mobile transition remains a bigger tailwind for Facebook than any other large-cap in the Internet media group," Post said.

-Jennifer Booton; 415-439-6400; [e-mail]