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Is Facebook a buying opportunity after the Cambridge Analytica scandal?By PC Lee
SINGAPORE (Apr 3): Phillip Capital believes the Cambridge Analytica scandal has provided investors with a good opportunity to pick up Facebook (FB) at a discount.
The research house expects that the potential fallout from the scandal will be limited and unlikely to permanently damage Facebook's business model.
"We are bullish on FB due to its massive user base, digital advertising growth and valuations given FB’s growth prospects. As such, we believe that stock is undervalued and the current scandal represents a buying opportunity," says Phillip which has a US$159.79 ($209.21) entry price and US$220 target price.
FB’s share price fell drastically after the Cambridge Analytica scandal, when it was revealed that the political analytics company was able to access more than 50 million Facebook profiles without users’ permissions.
"We believe that while the news seems bad, the potential fallout and damage to FB’s intrinsic value has been blown out of proportion and that the current situation represents a buying opportunity for the social media giant," says lead analyst Ho Kang Wei in a Monday report.
In its latest quarter, FB reported its daily active users totalled about 1.40 billion users and had 2.13 billion monthly active users. More importantly, FB was able to generate about US$39.94 billion in revenue from advertising off that user base.
In terms of revenue, the average revenue per user from US was US$26.26, while the average revenue per user for Europe, Asia Pacific and others were US$8.71, US$2.52 and US$1.85 respectively.
"As the
rest of the emerging markets become more affluent and companies start spending more to advertise to them, we believe that FB has great potential to further monetise its users from the rest of the world," says Ho.
According to Ho, digital ad spending is expected to continue to grow strongly, and is estimated to reach about US$375.8 billion by 2021. Assuming FB is able to maintain its 25.7% market share, this would amount to a revenue of US$96.58 billion by 2021, which represents a four-year CAGR of about 24%.
"While this is lower than FB’s past five years CAGR of 52%, it is still very high," says Ho.
FB closed at US$159.79 on Monday and trades at a
forward PER of 18.95. FB’s four-year average PER is 53.64. FB’s total revenue for 2017 was US$40.65 billion and over the past five years, it has been able to grow that revenue by about 50.75% p.a.
Meanwhile, FB has been able to generate a free cash flow of US$17.483 billion for FY17 and has been able to consistently grow free cash flows too, up from US$11.62 billion in FY16 and US$7.80 billion in FY15.
In addition, FB's net margin is also very impressive at
39.20% in FY17, up from 36.97% in FY16 and 20.57% in FY15.
"Given FB’s growth prospects and very impressive financials, we believe that FB is undervalued at current prices," says Ho.
Lastly, Ho believes the US government is unlikely to pass legislation that will permanently damage FB’s ability to conduct business, as any such legislation would not only impact FB but likely all data based companies as well.
"FB may have suffered some damage with the recent boycott Facebook movement. However, we do not believe that FB has suffered much permanent damage in this regard either, as users will be hard press to find an alternative for Facebook as a social media platform in terms of scale and features," concludes Ho.
Source: The Edge
https://www.theedgesingapore.com/facebo ... 7-91832885
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