REALITY CHECK: A More Rational Analyst Price Target for Facebook

Bernstein Research launched its coverage of Facebook (NASDAQ:FB) stock with an underperform rating, leading to shares dropping further on Monday. Facebo0k shares closed down over 2 percent at $26.90 Monday, even touching $26.44, the lowest intraday price since the stock began trading at $38 on May 18. According to Bernstein’s Carlos Kirjner, Facebook shares face a “material risk” because investors will question the company’s ability to meet forecasts.

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“We believe there is material risk that over the next 12 months investors will question Facebook’s ability to achieve our forecasted 2013 revenues as near-term revenue growth decelerates,” Kirjner wrote in a research note on Monday.

Kirjner set a price target of $25, and projected that the company was likely to earn 25 cents a share in 2012 and grow to 65 cents per share in 2013. At the time of its initial public offering, underwriters led by Morgan Stanley (NYSE:MS) set a price of $38, which valued Facebook at 107 times reported earnings in the past 12 months

“While this deceleration may ultimately prove to be a temporary setback if, over time, Facebook manages to improve monetization of its inventory (both PC- and mobile-based) and maximize the value of social advertising, it will likely drive additional downside pressure on the stock beyond what is already reflected in our price target. Therefore, it is difficult to argue for owning the stock today.”

According to Kirjner, Facebook’s revenue growth will have to come from better monetizing of display ads and social advertising, as well as additional business opportunities.

The analyst predicts the company to double its share of the global display ad market to 18 percent by 2017 and puts the value of the display business at $21 per share. According to Kirjner, ad revenue for the company will grow 38 percent in 2012 and 32 percent in 2013. The analyst adds that social advertising theoretically had the potential of growing the annual revenue per user from $4.43 in 2011 to $9.42 in 2015, and $22.66 in 2025, but remained skeptical of that actually coming true.

“While there is evidence that social advertising could prove effective in some instances and drive some further upside for Facebook and its shareholders, we believe there is material uncertainty around the timing and extent of such upside and that this uncertainty will not be resolved in the next 12 months,” he wrote.

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