Facebook to report solid earnings, stock to rally 14 percent in the next 12 months, Pacific Crest predicts

Published Thu, Jan 26 201710:54 AM EST

Pacific Crest on Thursday predicted Facebook would report solid earnings on Feb. 1. The research firm reiterated an overweight rating on the social media giant. "We believe Facebook's scale in engagement provides a significant barrier to entry and a competitive advantage in testing, analyzing and rapidly evolving new services. In 2017, we expect this to help it continue increasing average engagement across its key platforms and increasing ad pricing," equity analyst Andy Hargreaves wrote in a research note. Hargreaves believes Facebook is positioned to quickly evolve its video service to increase user engagement and create another source of incremental revenue. Shares of Facebook are up 14 percent this month, recovering from a recent low reached at the end of December. Facebook, 1 year Source: FactSet "We believe the key to medium-term stock performance will be Facebook's strategic position in video and how effectively it attacks the brand advertising market," Hargreaves said. Over the next two years, the analyst predicts Facebook will take away ad dollars spent on traditional TV networks as advertisers shift their budgets to social media due to higher-engagement trends. "Creating brand advertiser comfort with the medium and measurement will likely be a slow and steady process, as TV ad buyers still purchase on relatively archaic metrics. The launch of a video product with higher-quality content could accelerate that pace of adoption," Hargreaves said. In the near term, the analyst predicts user growth, pricing power and video engagement are likely to overshadow investor concerns over slowing ad load growth, which measures the number of ads Facebook shows its users. "We expect solid Q4 [fourth-quarter] results and believe the likelihood for cautious commentary on ad load and conservative expense guidance are captured in current expectations," Hargreaves said. On the upcoming quarter, he wrote: "We expect daily active users to grow 16.5% y/y, which is slightly ahead of the consensus estimate of 14.8% and drives our Q4 ad revenue estimate to $8.47 billion versus the consensus estimate of $8.29 billion. We expect the revenue upside to drive non-GAAP EPS to $1.37, ahead of the consensus estimate of $1.30." Over the long term, Pacific Crest sees the potential for Facebook to monetize its messaging services (Messenger, WhatsApp), as millions of people around the globe continue to adopt those products. In the next 12 months, Pacific Crest says Facebook could trade as high as $150, implying a gain of 14 percent from Wednesday's close. The firm says its multiyear bull case puts that price target at $193 or 47 percent higher from here.

Mark Zuckerberg

Chris Ratcliffe | Bloomberg | Getty Images

Pacific Crest on Thursday predicted Facebook would report solid earnings on Feb. 1. The research firm reiterated an overweight rating on the social media giant.

"We believe Facebook's scale in engagement provides a significant barrier to entry and a competitive advantage in testing, analyzing and rapidly evolving new services. In 2017, we expect this to help it continue increasing average engagement across its key platforms and increasing ad pricing," equity analyst Andy Hargreaves wrote in a research note.

Hargreaves believes Facebook is positioned to quickly evolve its video service to increase user engagement and create another source of incremental revenue.

Shares of Facebook are up 14 percent this month, recovering from a recent low reached at the end of December.