Facebook Has Near 70% Upside On ARPU Basis, Says CLSA

• Facebook Inc FB shares are down 9 percent since January 4.
• CLSA’s James Lee maintained a Buy rating for the company, while raising the price target from $135 to $150.
• Facebook is poised for robust growth, driven by positive product mix shift, increased political spending and new ad inventory from Instagram, Lee stated.

Facebook reported robust quarterly results, with a 31 percent q/q growth in ad revenues. The company’s 2015 total expenses were up 50 percent y/y, lower than the earlier guided level of 70 percent. The company’s robust revenue growth was driven by mobiles, which constituted 80 percent of total ad revenues.

Analyst James Lee expects Facebook’s positive product mix shift to drive pricing with new ad inventory from Instagram and political spending arising from the Presidential elections.

“In addition, a positive product mix shift into video, Carousels and DPAs will continue to drive pricing leverage. Heading into 2017 and 2018, we anticipate Facebook Audience Network (FAN) and WhatsApp/Facebook Messenger (FBM) to have a clear monetization roadmap,” the analyst wrote.

Lee believes that video advertising on Facebook will emerge as a meaningful revenue contributor in coming years. He expects the company to record incremental $8 revenue per user by 2018. “We are still seeing nearly 70% upside on an Arpu basis from new revenues yet to build into our model,” the CLSA report stated.

The non-GAAP EPS estimates for 2016 and 2017 have been raised from $3.07 to $3.29 and from $4.18 to $4.42, respectively.