Morgan Stanley Cuts Facebook Forecast - Business Insider

AP

Facebook CFO David Ebersman in happier times.

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Facebook's stock has dropped under $18 today, hitting a new all-time low.

One reason the stock is sinking is a new report from Morgan Stanley analyst Scott Devitt that cuts the company's long-term forecast as well as its 12-month price target.

Morgan Stanley was Facebook's lead IPO underwriter. The underwriting business and analyst/research business should operate independently of each other, so Devitt trimming Facebook's numbers shouldn't raise eyebrows. But people are still going to talk about the relationship between Facebook and Morgan Stanley making this report more harmful than most.

Devitt's new price target is $32, which is crushing for investors that bought the IPO. What Devitt is saying is that if you bought the IPO, a year and three months later you still will have lost money on the investment.

Devitt is adjusting his forecast because mobile use is on the rise and Facebook serves fewer ads in its mobile ads. He also believes new users are less engaged than older users which will affect revenue

Here are the three main points from his note:

Improved mobile user experience: Facebook released updates to its iOS mobile apps on August 23 that improve core features such as photo browsing and notifications; industry participants believe speeds have doubled too. FB also appears to have increased materially the number of mobile Sponsored Stories, from 0-1 per day in July to 2-6 per day today. Due to higher click-through rates, we believe mobile ads may be around 4X as valuable as standard desktop ads, and we boost our overall ad pricing assumptions by around 5%.

But fewer ads per user; lower long-term engagement potential: A better mobile experience may decrease time spent on FB?s desktop site, where it shows around 30X more ads/user/day (86 on desktop vs. 2.5 on mobile in 3QE). Greater mobile usage reduces our estimate of ads/user/day by around 5%, rendering our higher pricing assumptions about net revenue-neutral. Separately, due to a Q/Q decline in 2Q user engagement metrics and management commentary suggesting that late adopters may be less-engaged, we reduce our 2015E-2020E daily engagement, and therefore revenue, by 2%-8%.

Estimates, valuation, risks: Our model changes are long-term in nature: we leave 2012E-2014E unchanged but reduce 2015E-2020E revenue and EPS by 2%-8%. Our 12-month DCF-driven price target is $32 (vs. $38 previously), equivalent to 12X/9X 2013E/2014E revenue, 20X/15X EBITDA, and 39X/29X EPS against 27%/30%/30% revenue/EBITDA/EPS CAGRs from 2013-2016. We incorporate stock-based compensation as a cash expense in our DCF. Key risks include ad pricing, mobile transition, and privacy-related legislation.

Source: http://www.businessinsider.com/morgan-stanley-cuts-facebook-forecast-2012-9

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