Facebook reported a strong Q2 with numbers topping Street projections, and coming roughly in-line with our estimates. While we believe expectations had clearly moved up into the print, and results may have come in a touch shy of whisper numbers, we view the results as another solid indication of Facebook’s overall market strength. Our rating remains Overweight, but we are increasing our price target to $105.
As we look towards 2016 and beyond, we believe Facebook remains positioned to benefit from multiple initiatives which include: 1) Premium Video which should exert a greater impact in 2H15, 2) Instagram, and 3) the continued adoption of the Audience Network. Looking longer-term, there remains optionality from as-of-yet monetized properties such as WhatsApp.
Following our product-by-product analysis for both existing and still nascent businesses, Facebook remains one of our highest-conviction ideas – particularly in context of the stacked product release slate we believe it has in store as well as the multiple paths to shareholder value creation via monetization of existing users as well as laying the groundwork to build users on the non-Facebook.com properties.
Advertising was the clear driver of the strength with 43% y/y growth, which would have been 55% without the impact of currency. Mobile is now 76% of the total advertising revenue with desktop at 24%, compared to a year ago when mobile was 62% and desktop was 38%. The shift to mobile is still in progress and will likely continue to become a larger portion of revenue throughout the next two years at least. Payments were weak down 8% y/y.
The United States was the strongest geography for Facebook overall, with acceleration to 50.4% y/y growth in Q2 from 47.5% in Q1.
At ~$94 in the aftermarket, FB is trading at 47x and 39x our CY15 and CY16non-GAAP EPS forecasts of $2.01 and $2.42 ($2.00 and $2.52 prior). We reiterate our Buy rating and raise our 12-month price target (DCF, EV/EBITDA, EV/FCF) from $102 to $110 based on raised valuation multiples given the strong mobile trajectory.