Why Facebook Is The Best Pure Play In Consumer Internet

“We think Facebook Inc (NASDAQ: FB) is the best pure play in consumer Internet around the secular growth in mobile advertising, full stop,” Barclays’ Ross Sandler said in a note, while initiating coverage of the company with an Overweight rating and $154 price target.

Best Pure Play

The analyst believes that although some emerging technologies could eventually take usage away from smartphone, the next 3-5 years could be “a golden era” for mobile, with meaningful budgets being allocated as the space matures and monetization improving quickly.

Expressing optimism regarding Facebook’s newsfeed app, Sandler mentioned it was likely to continue to drive core Facebook and Instagram, both of which have a long runway for growth going forward.

“Messenger & WhatsApp are the “second act” in mobile monetization for FB, and we see $11B in incremental revenue by 2020,” the analyst stated.

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Some Grey Areas

Sandler also believes at its current valuation, Facebook is a good option for GARP (growth at a reasonable price) investors, and although margin compression is expected to persist, the shares are likely to continue to outperform.

On the other hand, the analyst pointed out the “long-time risk to FB that hit all of its predecessors but has yet to materialize is that the moat around its user base isn’t as large as investors probably think, and as users move to other options in social, the network may atrophy and growth may stall.”

For the near term, Sandler expects the transition to video content and ads in the newsfeed to drive revenue and engagement, although gross margin would be adversely impacted.

“FB is entering the phase of its evolution where operating margins are likely to decline, …which may weigh on valuation,” the analyst added.