SAN DIEGO, CALIF. (TheStreet) -- What's not to like about Facebook (FB) ? That's the consensus of MKM Partners, which Friday initiated coverage with a "buy" rating and a $105 price target on confidence in the company's ability to break the here-today, gone-tomorrow curse associated with social networks thanks to its ownership of Instagram and WhatsApp.
The $105 price target is a 40% premium over Thursday's close price of $75.24, and would make Facebook's market cap nearly $300 billion, compared to just under $210 billion as of yesterday. The firm is particularly bullish on Facebook's business model, which comes without the burden of traffic acquisition costs, and its long-term ability to juice revenue with help from video ads. Video ads are "likely the largest growth driver for the next decade," according to MKM Partners analyst Rob Sanderson.
MKM Partners expects Facebook to grow annual revenue to $41 billion by 2018, with Instagram and WhatsApp collectively contributing 18% to the top line.
Instagram, in particular, stood out to the firm as a major contributing factor to Facebook's longevity. The photo-centric social network, now with more than 200 million active users, could have made a sizable dent in Facebook's popularity and livelihood had it remained independent.
"We view social networks as inherently unstable and consider disintermediation by 'the next cool thing' the greatest risk to FB. The acquisition of Instagram took out the largest medium term risk to FB," Sanderson wrote in the firm's Friday report. "For any network instability to manifest, there must to be a cutting edge platform for these power-users to leave to. Instagram was a very real threat."
Messaging app WhatsApp, which Facebook purchased for around $22 billion at the time the deal closed, could prove equally important in Facebook's efforts to avoid the fate of social network predecessors MySpace and Friendster. Though MKM Partners admits that it's unclear on how Facebook will monetize its messaging properties -- "the track record of desktop IM is not encouraging" -- the firm does believe that, with WhatsApp and Facebook Messenger in its back pocket, the social network is in the best position to own mobile identity, making it the medium responsible for the bulk of future digital communication and content.
"We think it's likely that the mobile messaging identity will become the most relevant communications identifier for users everywhere around the world," Sanderson said. "Mobile messaging applications may become the primary communications identity of users and transport medium for all types of applications."
The vote of extreme confidence -- the firm's 12-month price target puts a nearly $300 billion market value on Facebook -- comes on the heels of a strong third-quarter earnings report. Facebook beat both top and bottom line estimates with revenue of $3.2 billion and adjusted earnings per share of 42 cents. The social network, however, scared off short-term investors with warnings of higher expenses in the year ahead, and the stock has remained depressed by 5% ever since.
Facebook shares were higher Friday on back of the report, gaining 1.3% to $76.24.
--Written by Jennifer Van Grove in San Diego, Calif.
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