Do you honestly want to invest in stocks right now? It sure looks like the bull market is at least on spring break, if not over. But, if you are interested in putting some money to work just in case the pivot higher is right around the corner, then two firms say buy Facebook Inc (NASDAQ:FB).
Cantor Fitzgerald and Pivotal Research upgraded the social site leader to "Buy" from "Hold" recommendations. Both research teams set a price-target of $72, which is not a coincidence as they are both written by the same guy.
For the few who may not know, Facebook, Inc. (Facebook) is engaged in building products to create utility for users, developers, and advertisers. People use Facebook to stay connected with their friends and family, to discover what is going on in the world around them, and to share and express what matters to them to the people they care about. Developers can use the Facebook Platform to build applications and Websites that integrate with Facebook to reach its global network of users and to build personalized and social products. It offers advertisers a combination of reach, relevance, social context and engagement.
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The two-time analyst, Brian Wieser tells interested FB investors, "We are upgrading Facebook to Buy from Hold, reflecting both our revision in costs of capital for the company (and others among our coverage universe), and the only-partially warranted sell-off for the stock following the WhatsApp and Oculus acquisition announcements. Although the stock posted strong gains yesterday, we think there is more room for the stock to run ahead of and probably after the company's 1Q14 earnings. While consensus estimates appear to be in-line with our estimates for the current quarter, we think estimates for later in the year are probably under-stated."
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Wieser adds, "Core big brand segment of marketers should generally continue to expand their budgets with Facebook this year," In detail, he is calling for ad revenue growth to "exceed 50% each quarter this year until the fourth quarter (with advertising growth of 65% during 1Q14 specifically."
So, Cantor/ Pivotal call is earnings based with the anticipation that FB will pound Wall Street's consensus estimate. Considering the post-earnings-drift phenomenon, (stocks tend to outperform in the direction of earnings surprises), it's a good bet for both firms if Wieser has made the correct call.
Minus Facebook's first quarter as a publicly traded company, EPS exceeded Wall Street's consensus outlook by an average of 8.41%. Things have improved a lot in the last four quarters with an average bullish surprise of 20.74%.
As is it now, the street believes Facebook will earn $1.26 for 2014. I few apply the average surprises outlined above, then we can create hypothetical earnings estimates of $1.37 and $1.52, respectively.
Since IPOing and turning a profit, the internet information provider traded with a minimum price-to-earnings (P/E) ratio of 59.38. Using our supposed EPS estimates, Facebook shares would trade between $81.35 and $90.60.
Now, iStock prefers a P/E that matches earnings per share growth. The current consensus projects a year-over-year (YoY) increase of 43.2%. Using that as our P/E with our hypothetical numbers, we get price-targets of $59.18 and $65.66.
If we use the growth rates our iEstimates suggest, then we get potential 1 for 1 P/Es of 55.67 and 72.72. Once again, we do some multiplying and calculate stock prices of $76.27 (fairly close to Wieser) and $110.53.
Overall: Facebook Inc (NASDAQ:FB) could become a highly attractive buy if the market continues to tank. Based on FB's recent history of bypassing the street's profit view, odds are the company will earn more than $1.26 for 2014. To hit $72, as Brian Wieser is calling for, would probably require YoY earnings growth of 50% or more – a no brainer if FB continues to produce bullish earnings surprises.
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