Why One Analyst Sees Large Upside in Facebook Ahead of Earnings

Just a couple of days before Facebook reports earnings, Oppenheimer released a report saying that it expects strong first quarter results, driven by higher mobile engagement and strong monetization. The firm forecasts currency hurting the first and second quarter revenues by 7% and 9% versus 5% previously. Street estimates appear conservative for expense growth, as the 2014 fourth quarter’s headcount increased “only” 45% compared to a 55% estimate for the first quarter. Oppenheimer maintained an Outperform rating and set $100 as its price target, implying an upside of nearly 21% from current prices.

Oppenheimer’s channel checks suggested that social ad budgets were flattish sequentially versus a mid-single digit quarter-over-quarter decline last year. Currently audience targeting is better identifying “intended impressions,” driving meaningfully higher click-through rates. Meanwhile, Facebook is gaining a higher market share of the mobile Internet and at the same time its increase in advertisers suggests that there are more impressions at higher rates.

The firm believes that Facebook shares have lagged since fourth quarter earnings due to the company’s 50% to 65% year over year guidance for expense growth. While the first quarter revenue/EBITDA is in line with the Street (with non-GAAP expense of +55% year over year), this could prove overly conservative given FX and fourth quarter headcount (+45% year over year).

The Street is forecasting slowing ad revenue through the year, even with new ad products being rolled out. The Facebook Audience Network (FAN) and Atlas launched globally in the fourth quarter. Also recent LiveRail improvements suggest that revenue from third-party sites or applications could provide some upside to second half estimates.

A few other firms took the chance to weigh in on Facebook ahead of its earnings:

• SunTrust had a Buy rating and set its price target at $90
• Brean Capital reiterated a Buy rating and set its price target at $96
• Citigroup had a Buy rating and moved its price target up to $97 from $91

Shares of Facebook were up 2.4% at $82.74 on Monday afternoon. The stock has a consensus analyst price target of $92.77 and a 52-week trading range of $54.66 to $86.07.