Facebook Keeps Climbing: Are the Bulls Being Too Aggressive?

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Facebook (NASDAQ:FB) shares have almost fully recovered from March’s selling pressure, as the stock now approaches all-time highs. Much of Facebook’s valuation is tied to future expectations and hopes of better monetizing its near-1.3 billion monthly active users with video advertisements and payment processing, as well as by driving higher its average revenue per user on the advertising front. Yet, with a market capitalization of $165 billion, there are still many analysts who believe Facebook shares can go even higher.

Analysts have been particularly bullish on Facebook in the last couple of weeks. Sterne Agee made one of the more bullish Facebook calls that we’ve seen to date, with an $80 price target and expectations for $30 billion in revenue by 2018. Clearly this is looking way into the future and assuming that all of the company’s dominos will fall in place.

Sterne’s bullish outlook rests on the belief that Facebook will eventually command 13 percent of all global digital advertising, a market currently controlled by Google (NASDAQ:GOOG)(NASDAQ:GOOGL). However, Sterne doesn’t believe that Facebook’s core platform will be the only contributor, looking at better monetization of Instagram, WhatsApp, and its Messenger application.

Facebook has yet to implement aggressive advertising strategies in these non-core applications, but with the three noted apps combined with its core platform, Facebook has well over 2 billion monthly active users. Moreover, there is an enormous disconnect between its average-revenue-per-user, or ARPU, and Google. Specifically, Facebook and Google have an ARPU of $7.24 and $45, respectively, thus implying that there is far more upside potential for Facebook to grow its advertising dollars.

With nearly all of Facebook’s $7.9 billion in revenue coming from advertising last year, it’s easy to see how the company’s fundamentals could double, if not triple, when you consider Google’s success.

Aside from Sterne Agee, Cantor Fitzgerald also gave Facebook an $80 price target, but instead of citing non-core applications and higher ARPUs, the firm focused on video advertising. Cantor notes that Facebook’s video algorithm has been successful ,and as it rolls out such advertisements on a more aggressive scale, the company’s revenue could skyrocket.

As most know, Facebook has already rolled out video advertising, charging $2 million per 24-hour period per advertisement. The company is reportedly running just a few video ads per day. However, it’s the possible supply and demand that has analysts excited.

Facebook’s 800 million-plus daily active users is more than seven times more than the number of people who watched the Super Bowl earlier this year. Yet Facebook’s video advertisements cost 50 percent less than a Super Bowl ad and run all day, versus one 30-second slot. While this isn’t a perfect illustration, it does show how Facebook could eventually run more video ads on a daily basis and at a higher cost. With that said, investors can see how video advertisements could help Facebook’s total revenue soar.

In the last 10 days, two different firms have issued an $80 price target on Facebook for two very different reasons. While the points are all good, when you consider the combination of catalysts, it seems reasonable that Facebook may exceed even the most bullish of expectations and perhaps soar beyond $80 per share.

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