How Facebook could rally more than 30%

Published Wed, Jun 17 201512:03 PM EDT

A Wall Street analyst makes a compelling case that Facebook shares could rise more than 30 percent over the next 12 months as it starts to monetize its non-core properties WhatsApp, Instagram and Messenger. Sarah Hindlian of Brean Capital believes her peers are significantly undervaluing the contributions to revenue these three services will make to Facebook's revenue next year. If that becomes clear to more analysts, the shares could take off. Facebook closed Tuesday at $81.06 a share. Hindlian's $108 price target is the second highest on Wall Street, behind a $114 projection from a Hilliard Lyons analyst. Here's how Brean sees the social networking giant getting there... "Our buy thesis is derived from our view that Facebook still has ample runway for growth through pricing leverage, continued user expansion, and the successful monetization of acquired platforms Instagram and WhatsApp," states the report sent to Brean clients Wednesday. Facebook shares gained almost 1 percent in morning trading after the pre-market call. Read More Anything left that can save Twitter's stock? On WhatsApp, which Facebook purchased for more than $20 billion last year, Brean projects the unit will post $1.14 billion in revenue next year and then triple that to $3.3 billion in 2017. "We believe that Facebook has decided to take a slower approach to WhatsApp monetization given ample runway for growth from other initiatives (video, Instagram), and we expect the focus to shift to monetization in mid-FY'16. Embedded in our recent work on WhatsApp's longer term plans for monetization, we expect the emphasis to remain on user-fees as opposed to advertising or other non-ad based monetization services (Payments, ecommerce, etc.)." The revenue contribution from Instagram, purchased in 2012 for about $1 billion, will be $2.5 billion next year, according to the analyst, who calculates that the rest of Wall Street is expecting a 2016 revenue figure below $1 billion from the unit. "Instagram recently announced that it would be carefully ramping what is now largely a beta testing advertising platform....We anticipate that the ramp picks up in Q4'15 but believe ad budgets will be transitioning in Q3'15 already. We note that our checks suggest that the budget shift to video ads and Instagram are coming from traditional/TV advertising, and that budgets on other social media platforms are not net losing ad dollars." And Hindlian had this to say on Facebook Messenger: "Facebook's Messenger could add over $1.3 billion to annual revenues in FY'16 per our bear case scenario analysis. This could reach $3.3 billion in our Base Case or as high as $4.1 billion in our bull case." Despite this bullish outlook from Brean and others, Facebook shares are up just 5 percent so far in 2015, less than the Nasdaq Composite's 7 percent gain. Competitor Twitter is down 4 percent this year.

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Sarah Hindlian of Brean Capital believes her peers are significantly undervaluing the contributions to revenue these three services will make to Facebook's revenue next year. If that becomes clear to more analysts, the shares could take off.

Facebook closed Tuesday at $81.06 a share. Hindlian's $108 price target is the second highest on Wall Street, behind a $114 projection from a Hilliard Lyons analyst.

Here's how Brean sees the social networking giant getting there...