Facebook Closes Up 5%: Topeka Starts at Buy, $40 Target, on `Incrementa` Options

By Tiernan Ray

Facebook (FB) shares staged quite a rebound this afternoon.

After hitting a low of $26.83, the stock closed up $1.41, or 5%, at $29.61, on a spike in volume, and it is rising further in the aftermarket.

The stock got one vote of confidence today, with Topeka Capital Markets’s Victor Anthony this morning kicking off coverage with a Buy rating and a $40 price target, with the tag line, “We ‘Like’ The Optionality.”

What does Anthony mean by optionality?

The company is in the “early innings of its monetization potential,” writes Anthony, and he proposes four “key questions,” the answers to which underly his price target:

1. How much incremental money can Facebook make from their 900M-plus user base and the content those users provide?
2. How and when will those monetization opportunities be available to advertisers and users?
3. How much of it will advertisers and users buy?
4. What is the value of these options?

Anthony’s answer is to project a $1.88 trillion addressable market in advertising and commerce for Facebook come 2016. Today, Facebook has just half a percent of all of its addressable market.

Anthony provides a table of the addressable market, how it will grow, and what portions Facebook currently serves:

“If we assume that Facebook captures just 1% of those additional markets by 2016, while keeping its share of desktop display and virtual goods constant,” he writes, “we estimate that the shares would be worth $51 today.”

To explain that, Anthony models what might be $23.8 billion in total revenue come 2016, and an Ebitda of $14.8 billion, and a 15 times multiple of that, and then discounts it back, with adjustments, to a $142 billion present equity value, or $51 per share.

To get the actual stock valuation, Anthony assigns a 20 times multiple of enterprise value to Ebitda to the company’s projected 2014 adjusted Ebitda, which he thinks is “reasonable” given what he expects is a long-term rate of growth of 29% in Ebitda.

Anthony’s official financial model doesn’t actually assume any of the upside he’s discussing, for the moment. For 2016, he is officially projecting just $12.93 billion in revenue, not the $24 billion in the hypothetical scenario discussed.

As for the rest of the model, he’s projecting $5.08 billion in revenue this year, Ebitda of $2.8 billion, and EPS of 43 cents. For 2013 he models $6.62 billion, $3.76 billion, and 54 cents a share. And for 2014, he models $8.4 billion, $5.077 billion, and 77 cents a share.

That’s a bit higher than what the Street is modeling. For 2012, analysts see $4.97 billion, $2.67 billion, and 56 cents; 2013, $6.64 billion, $3.8 billion, and 72 cents; and for 2014, $8.82 billion, $5.1 billion, and 95 cents.

And for those still doubting whether Facebook can “grow into its valuation,” Anthony takes another social stock, LinkedIn (LNKD), as precedent to say “yes”:

Facebook is valued at 63x 2012 Adjusted PE and 40x 2013 Adjusted PE, valuations some investors view as expensive. We point to the path that the shares of LinkedIn (LNKD:$98.13:NR) have followed as precedence. From the summer of 2011 to today, the PE multiple has contracted 40%, while the share price has increased 28%. We are likely to see the same scenario for Facebook as Street estimates increase and the share price reacts positively.

http://blogs.barrons.com