Why Equity Analysts Like Facebook

Wide-moat social media company seeing growth in users, engagement, and online advertising but say the stock is currently trading at fair value

Morningstar Equity Analysts 11 July, 2016 | 1:03PM
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Ali Mogharabi: Facebook (FB) is the largest social network with more than 1.6 billion monthly active users. The growth in users and user engagement, along with the valuable data that they generate, make Facebook attractive to advertisers. The combination of these assets and continuing growth in online advertising bodes well for Facebook, as the firm generates strong revenue growth, remains cash flow positive, and profitable.

Apps that keep users engaged with Facebook's ecosystem have helped increase users and user interaction. With more user interaction, more data is compiled and then used by Facebook and its advertising clients to launch online target ads.

We think Facebook is going to continue to benefit from more ad dollars being spent on online advertising, especially mobile and social network ads where Facebook is very well positioned.

The company is taking steps to further monetize its various apps, such as launching interactive video ads and chat bots. It is also applying artificial intelligence, and virtual and augmented reality technologies to various products, which we think can increase Facebook user engagement even more, driving more revenue growth from advertisers in the future.

Our fair value estimate for Facebook is $120 per share. While we remain confident in Facebook's stable and wide moat, we do recommend a wider margin of safety before investing, given that the shares are trading in three-star territory.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Facebook Inc A289.63 USD-4.47Rating

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Morningstar Equity Analysts  Morningstar stock and fund analysts cover 2,000 mutual funds, 2,100 equities, and 300 exchange-traded funds.