Analyst says Facebook is a 'buy,' predicts $46 price target

Sterne Agee analyst Arvind Bhatia believes Facebook has a chance at becoming the "next Google" and disrupting the worldwide ad market.

Today's analysts don't waste any time telling investors what they think about prominent companies.

Sterne Agee analyst Arvind Bhatia initiated coverage on Facebook this morning with a "buy" rating. And although Facebook is expected to go public in the next few weeks between $28 and $35 a share, Bhatia thinks the stock could hit $46 within the next 12 months.

Bhatia bases his bullish opinion of Facebook's shares on a host of factors, including his contention that the company's monthly active users will grow from about 900 million right now to more than 1.5 billion in 2016. He also believes that the company will be able to triple revenue and earnings before interest, taxes, depreciation, and amortization (EBITDA) within the next five years.

"Our estimates would be achievable if Facebook increases its share of online advertising by only 300 basis points from 5 percent in 2011 to close to 8 percent by 2016," Bhatia wrote. "In addition, we have very little contribution from mobile and China modeled currently and as such our estimates could prove conservative. Together, Mobile and China could add $1.5B in incremental revenue and $600 million in incremental EBITDA by 2015."

Facebook announced its IPO pricing range last week . If the company prices its shares at the midpoint of that range, it could land $5.6 billion of cash in the offering. A higher price would help it raise even more cash, which the company says, could be used to help it grow.

However, Bhatia thinks Facebook's greatest growth opportunity is in the advertising market where, he said he believes, the world's largest social network could change everything.

"We believe Facebook is in the early innings of revolutionizing the $600 billion worldwide advertising market, particularly the sub-segment of online advertising," Bhatia said, adding that "Facebook is well-positioned" to take advantage of the increasing popularity of social-media advertising.

Looking ahead, Bhatia estimates Facebook will see its revenue rise sharply over the next several years, hitting $5 billion this year and growing to $11.4 billion in 2016. Bhatia expects Facebook to generate $1.5 billion in net income this year, and watch that figure grow to $4 billion by 2016.

One other note on Bhatia's report: Within the next 24 months, he anticipates Facebook's shares hitting $59.

 

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