Facebook Inc (FB) Traders Aren’t Pricing in WhatsApp or Messenger

Facebook Inc NASDAQ:FB

Facebook Inc shares have soared to all time highs this week, but those trading the stock still aren’t giving it its full value. That’s the line a new report from Deutsche Bank on the social network takes, and it’s one that was repeated in a report from Morgan Stanley on Wednesday morning.

Facebook Inc NASDAQ:FB

Ross Sandler at Deutsce Bank, in a report released before the market opened on July 15, said that he sees “meaningful upward estimate revision over the next 2-3 years as the family of apps outside of core FB start to monetize.” That’s why, in his view, shares in Mark Zuckerberg’s firm are worth $100. Brian Nowak from Morgan Stanley went further, putting a $110 price target on shares.

Facebook isn’t just a social network

A key point in Mr. Sandler’s report is the lack of weight given to the growth in the other Facebook products. Instagram, Messenger and WhatsApp are all doing very well, but those trading the stock aren’t pricing their full sales potential into the future of the stock.

Sandler says that Instagram is being appreciated by the market, but there’s more growth to come from outside it. “The recent move in FB shares was on Instagram’s increased monetization and anticipation of upside to 2Q, warranted in our view. From here new revenue opportunities outside of core newsfeed are likely to take FB shares higher,” he says.

At the same time Morgan Stanley’s Nowak highlighted the high return that Facebook gets from investment and its mobile leadership as reasons for its high target on shares.

Nowak said that engagement it growing and Facebook now accounts for 20 percent of all mobile time in the US. Given the firm’s current low cost per impression, he expects ad prices to rise, and expense growth to slow down in the year ahead. Mr. Nowak had a price target of $94 on Facebook  shares before this morning’s release.

The return highlighted by Mr. Nowak is clearly shown in the growth of Instagram. Facebook bought the firm for just $1bn back in 2012, but it’s set to pass that in revenue very soon.

Facebook looks for earnings growth

Messenger and WhatsApp may not be fully priced into Facebook shares if Mr. Sandler is right, but neither firm offers much to Facebook investors right now. Sandler reckons that the market has not yet priced in the “$9B-$10B in potential incremental revenue by 2020” that he sees from those products.

Facebook will reveal its numbers for the three months through June on July 29 after the market closes in New York. Instagram will be a major focus for those with shares, but thinking in the longer term results in more value says Sandler.

Facebook is set to show EPS of 47 cents in its coming earnings report according to the consensus of 42 analysts covering the firm. Revenue is set to come in at $3.98bn for the three months.

Those trading Facebook will be more and more focused on the three non-core apps that drive the Facebook golden circle in the coming years. As Facebook does more to figure out mobile ads than anybody else, including Google, and it improves those products, Instagram, WhatsApp and Messenger are going to become central parts of its earnings model.

Mr. Sandler suggests that investors look forward to that now in order to get a feeling for the full value of Facebook.

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