Credit Suisse (CS) previews Facebook Inc. (NASDAQ:FB) 4Q16 results. As Credit Suisse recalibrates it product-by-product model its price target resets to $165 vs prior $170 and FY17 adj. EPS estimate is now $4.63.
Credit Suisse believes FB shares are mispriced and present favorable risk/reward on the long side with downside risk to ~$93 and upside potential to even just its target. Credit Suisse addresses the controversial factors (ad load, OpEx growth) that have been overhangs and submit that these will be resolved to the positive within the next twelve months, opening the way for the multiple to expand to levels more in-line with its growth. OpEx and investment growth will be addressed on the 4Q16 earnings call and CS expects the question of revenue growth in 2H17 to be addressed certainly by the 3Q17 print if not before.
As Credit Suisse has alluded to before, it does not believe the Street is giving FB shares any credit for potential moves to monetize Messenger so any incremental news in this regard should serve as a positive catalyst. CS’s overall investment thesis on FB shares remain unchanged: 1) Facebook will be able to drive long term revenue growth without a material lift in ad loads - near-term drivers include Instagram, Premium Video, and DPA, 2) Street models continue to underestimate the long-term monetization potential of upcoming new products (Graph Search), 3) optionality and upward bias to estimates, which do not contemplate contributions from multiple other products including Messenger and WhatsApp.
Credit Suisse’s DCF-based price target, which uses a 10.5% weighted average cost of capital and 3% terminal growth rate, is now $165 versus prior $170.