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Is Facebook a $150 stock?

I suggested in my preview, ‘Five key reasons why traders will like Facebook’s earnings’, that the risks were for fantastic Q1 earnings numbers and Facebook (FB) have not disappointed.

Facebook
Source: Bloomberg

Make no bones, these numbers are really strong and of exceptional quality, with 52% revenue growth and EPS (adjusted) smashing the street’s estimate of 63c by 22%. Daily active users were also higher than forecast, and it’s absolutely incredible to think they have 1.65 billion monthly active users. Truly staggering numbers.

Facebook also generated $3 billion in operating cash flow, which should flow nicely into estimates that they will produce over $10 billion in cash this year. Mobile advertising made up a sizeable 82% of total advertising revenue, a two percentage point increase on the quarter and up from 73% in Q1 15. To put the overall dominance FB command in the global digital advertising space, there is a belief they could attract close to half of the global digital advertising growth this year.

As mentioned in the earnings’ preview, FB is a brilliant business, it has a simple business model that focuses on its core activities and has a number of catalysts that will keep the earnings and margin expansion going. They are making massive and consistent levels of investment into the business, which will keep momentum going. The beat on earnings also keeps its exceptional pedigree at earnings going of not missing on quarterly earnings.

Much has been made about FB also announcing a new share structure (known as Class C stock) that will ultimately allow CEO Mark Zuckerberg to drawdown his position in the company while maintaining control. Importantly for short-term traders, this seems to have garnered little attention from analysts during the conference call.

I was keen to buy dips into the $100 to $90 region, but there has been really strong buying into $106.50 so my limit was perhaps optimistic. Still, the market has spoken out about how they see the earnings numbers with the stock closing above the January and March double top at $116.17. This effectively means the stock has rallied over 200% since its IPO and I see FB as a $150 stock within the coming 12 months, although there are rising risks of a strong pullback in US equity markets in the near-term. We need to also remember that the hugely positive quarter comes at a time that many other tech names have had a poor quarter and while they have a very different model I thoroughly expect strong outperformance going forward. Long positions are clearly preferred, although we may see some selling at $121.75 and the former January uptrend.

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