'Watch' Could Add $500 Million To Facebook Sales

Facebook Inc (NASDAQ: FB) has made no secret of the fact that it's making a big bet on video. According to one Wall Street analyst, Facebook Watch could generate more than half a billion dollars of revenue in 2018.

The Analyst

Morgan Stanley analyst Brian Nowak has an Overweight rating and $200 price target for Facebook.

The Thesis

Nowak is projecting Facebook will spend roughly $200 million producing original video content in 2018. He expects that aggressive budget will result in an estimated 15 longer-form and 100 shorter-form series.

Morgan Stanley is anticipating mid-roll ads on these videos, with partners getting 55 percent of the split, in-line with Alphabet Inc (NASDAQ: GOOG) (NASDAQ: GOOGL)’s YouTube split. However, Nowak expects ad revenue sharing will only begin once Facebook has recovered its initial $200 billion content costs.

“Monitoring Watch engagement trends will be critical to gauging FB's video success, and by our math FB needs to drive Watch engagement to ~2% of total core FB minutes to break-even on our base case ~$200mn content investment,” Nowak said in a note.

Broken down by user, Morgan Stanley estimates the break-even point for video represents about 7 minutes of watch time per day for each North American daily active user, or about 3 minutes per day if Facebook expands Watch outside North America to the rest of its international users.

Morgan Stanley estimates total Watch cost for Facebook in 2018 will be about $400 million once content costs and ad revenue sharing costs are factored in. However, Nowak estimates the feature could brng in $565 million in total revenue by year’s end.

Price Action

Facebook stock has continued its positive momentum in 2017. The stock has gained 51.8 percent year-to-date, roughly triple the return of the S&P 500.

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