Facebook (FB) received a couple of thumbs up today, from Topeka Capital Markets and Sterne Agee, both of which prognosticate about what may come down the road from more recent initiatives by the company to introduce new products.
Topeka’s Victor Anthony today reiterates a Buy rating on shares of and a $36 price target, writing that the company has three potential “catalysts” in 2013, which are the monetizing of Instagram, which Facebook acquired this year, the introduction of its own search engine, and inclusion in the�S&P 500.
Anthony declares that “Instagram has been a huge success for Facebook” because usage volume has topped�Twitter�in the U.S. in terms of “mobile engagement.”
“A September report from comScore stated that in August Instagram had 7.3 million daily active users (DAUs) in the U.S., topping Twitter�s 6.9 million mobile DAUs.”
It won’t be easy to monetize Instagram, but if Facebook can succeed, it could produce $250 million in additional revenue for Facebook annually, he believes:
We believe the solution is a native ad unit that is part of the user photo feed and could take the form of a sponsored photo ad unit, similar in function to the sponsored story ad unit that has worked impressively for Facebook on mobile. Brands and marketers could sponsor a photo that includes their brand, product, or a link to an offer. Facebook could decide to use the user�s activity on Facebook (what they or their friends have liked), assuming the Instagram user is also a Facebook user, to determine what ads to show. Instagram�s website can also serve as a destination for ads.
A search engine may be a big new debut next year worth billions to the company, he argues:
We have stated previously that we believe that a launch of a social search engine would be
worth $7-$8 per share to Facebook, based on conservative search monetization
assumptions, shown in the exhibit below. Here we assume that at full ramp, Facebook can
generate close to $5 billion in annual revenues and $2.5B in EBITDA from a search engine.
Mark Zuckerberg has already stated that the Company is actively working on a search
engine. We think he decides to launch the initial product at some point in 2013. The launch
should be a significant catalyst for the stock.
Anthony gives a back of the envelope on what S&P inclusion might require and might offer:
Garmin (GRMN) was the last addition to the S&P 500. The addition was announced after the close on December 5, 2012 and the first day price gain was 5.7%. Google�s (GOOG) stock increased approximately 7% on the announcement of inclusion into the index. Dan Doo, Topeka�s Head of Equity Portfolio Trading, estimates demand of 92-93 million shares of Facebook, 165% of Average Daily Volume, or approximately 10% of shares outstanding (Class A). Therefore, 10% of the shares would have to be including in index funds, which would reduce the supply of the stock. There are eight criteria for inclusion into the S&P 500 index [...] Of the eight criteria, we see the sector classification and the financial viability criteria, as two sticking points, with the latter, as likely the biggest hurdle. The financial viability criterion requires that companies report four consecutive quarters of positive earnings. Facebook reported a GAAP loss in 3Q12, so going by this strict requirement, Facebook will not be eligible until 4Q13, provided it reports positive GAAP net income in each of 4Q12-3Q13 quarters. However, we understand that the balance sheet criteria, which we believe Facebook meets, can be used in place of the four consecutive quarters of positive GAAP earnings.
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