PhillipCapital has initiated coverage on Facebook with a “buy” call and target price of US$424 ($573.77), with expectations that the company’s earnings will grow heading into FY2022. 

Analyst Jonathan Woo writes in a Sept 27 note that the social media company’s PATMI is expected to grow at a CAGR of 19% till FY2022, supported by growth in Family Monthly Active People (MAP) and Family Average Revenue per Person (ARPP).  

Facebook’s Family MAP was up 14% y-o-y in FY2020, from 2.9 billion to 3.3 billion people. Correspondingly, Family (ARPP) was also up by 17% y-o-y, due to increases in digital ad spending.

Woo estimates that worldwide digital ad spends as a percentage of total media ad spend is projected to increase from 58% in FY2020 to 68% by FY2024, ad spend is also projected to almost double from US$378 billion to US$646 billion in the same period. 

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Woo notes, “the strong growth in MAP and ARPP reflects FB’s ability to attract, retain and commercialise users on its platforms. We expect ARPP to increase 22% y-o-y in FY2021, on the back of tailwinds from a recovering advertising market.” 

But, he thinks that MAP growth rate will dip slightly in the later years to around 8-10% y-o-y. This is in view of strong competition from other social media platforms, as well as Facebook’s already large share of active Internet users around the world. 

Separately, he also highlights that Facebook is also expanding outside advertising into commerce and AR/VR verticals.

Woo sees that Facebook plans to capitalise on commerce to develop Shops into an all-in-one touchpoint for users to browse and transact without third-party diversions, similar to other e-commerce platforms.

More than 200 million small businesses around the world are currently estimated to be tapping Facebook’s reach and tools to promote their businesses – with this number growing each day.

As such, he thinks this is a “huge opportunity” to develop a new revenue stream to complement its main advertising business.

Revenue from payments & others was up 146% y-o-y in 1QFY2021, and we expect continued growth on the back of increased commerce activity and usage of WhatsApp Pay.

He also points out that Facebook is also doubling down on AR/VR products and services, touting its future potential as being more immersive products than current web browsers. 

This worldwide AR/VR market is projected to expand 10 times over the next four years – from US$30 billion to US$300 billion, providing the company with another large market opportunity to capture.

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Facebook’s financials also seem strong. The company recorded net margins of 34% in FY2020 - slightly below its 5-year average of 35%. Its largest cost item is R&D at 21% of revenue, and free cash flow (FCF) has been growing at a CAGR of 14% over the past three years despite the huge capital expenditure programmes.

Facebook closed at US$352.96, with a FY2021 price to earnings ratio of 29.2 times on Sept 24 (US time).