Facebook: Connecting the World

11/03/2015 8:00 am EST

Focus: STOCKS

Our latest featured recommendation operates the two most popular smartphone applications in the US and has successfully made the transition from desktop to mobile, asserts Joe Bonner, analyst with Argus Research.

CEO Mark Zuckerberg’s visionary goal for Facebook (FB) is to connect everyone in the world.

Facebook continues to gain traction on monetization through increased advertising, to broaden its appeal to users and to enter new areas such as virtual reality and messaging.

Facebook has continued to innovate to make its advertising more user-friendly and relevant, particularly on mobile.

ComScore has found that smartphone users spend 50% of their time on their most used application and 80% of their time on their top three applications.

The Facebook flagship app is far and away the leader in terms of both unique visitors and time spent.

Mr. Zuckerberg has also added the goal of connecting people with content. Recent innovations include the rollout of a payments function and the expansion of video functionality on the site.

The company has announced that its Oculus mobile “Gear VR” consumer virtual reality headset will launch in the US in November 2015, in time for the holiday season.

In another foray into e-commerce, Facebook has begun testing the addition of a new shopping section on its mobile app.

Facebook claimed 1.49 billion monthly active users as of the end of 2Q15, up 13% year-over-year. It has added more than 40 million new users in each of the last three quarters, which is remarkably steady growth.

Meanwhile, Instagram has over 300 million users and the company is just beginning to monetize this asset by rolling out advertising.

We are raising our 2015 EPS forecast by a penny to $2.04 and our 2016 forecast to $2.39 from $2.36.

Our estimates imply 16% average annual growth over the next two years. Our long-term growth rate forecast is 24%.

We rate Facebook’s financial strength as High, the highest rating on our five-point scale.

At the end of the second quarter, the company had cash, equivalents, and marketable securities of $14.1 billion and no debt—and at the end of 2Q15—generated $4.4 billion in trailing 12-month free cash flow.

There are risks. Facebook is almost entirely dependent on advertising revenue, which has grown to over 95% of total revenue.

And like any start-up, Facebook must successfully manage its explosive growth trajectory. It must also ensure system reliability in the face of increasingly toxic computer network attacks.

Facebook shares have risen 21% year-to-date, compared to a 2% decline in the S&P 500. We are raising our rating to Buy with a target price of $115.

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