Catch the falling knife.
That's the bold call from Needham analyst Laura Martin, who initiates the stock with a $40 price target, a number that would have seemed modest a couple of days ago, but which is in fact represents a 29% gain from where it closed yesterday.
Martin calls Facebook an "option on the world" and gives 5 main reasons to be bullish.
- Consumer adoption. With 900 million users after 8 years in existence, the company has solved the biggest problem in the world. It gook Google 14 years to get to this level and as such, the stock warrants a bigger premium at IPO than Google did, since Facebook has solved this question.
- Money follows time. With 14% of time spent online spent at Facebook, eventually the company will turn that into giant gobs of money.
- Margins are expanding. They were 33.7% in 2009 and 47.3% in 2011. Profit growth will outpace Revenue growth.
- Facebook has already shown a penchant for executing and since money follows time (a major theme), the company will find a way to cash in.
- Size. There's just no alternative at Facebook's global scale.
Here's Martin's basic model.
Note that the stock is priced at a massive 52.1x forward EPS on next year's earnings.
Since Martin is cognizant that people will freak out at these high multiples, she presents a more detailed defense of the rationales.
- Facebook has no consumer adoption risk.
- Money follows time (again).
- Facebook has much more upside thanks to payments and revenue sharing (with others wanting access sto its platform).
- "Platform optionality", which is just another way of saying that there's a huge potential for Facebook to discover more ways to make money.
- Margin growth.
- Facebook has the best management and employee base.
- Large-cap growth is a rare commodity.
- Facebook isn't in any index. Google outperformed significantly while it wasn't in any major index, and Facebook could too.
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