Facebook shares have risen about 3% over the last six months, largely due to weaker guidance for the second quarter of 2015 in the face of a stronger U.S. dollar. However, the company is still valued at a whopping $230 billion, which is completely justifiable, according to Canaccord Genuity analyst Michael Graham.
"We believe Facebook's fundamental outlook remains positive, underpinned by multiple revenue drivers that span both the near and long term," Graham wrote in a research note on Wednesday morning.
Graham, who rates Facebook as a buy with a price target of $90, laid out his argument in favor of Facebook's current valuation, citing strong growth and continued opportunity.
For one, Facebook continues to increase its monthly active users by more than 10% every quarter, with growth at 13% in the most recent quarter. Daily active users grew even faster at 17% in the last quarter. This, paired with ComScore numbers that show time spent on Facebook continually increasing, indicates increasing engagement on the platform, despite the fact that Facebook already has such a large user base.
Graham also argued that Facebook has a lot of room to grow ad revenue even though its ad numbers are already pretty healthy.
"Facebook has high monetization per user, but when adjusted for time spent (>20 hours per user per month) monetization remains lower than almost any comparable property (we estimate $38 per 1,000 user hours compared with $65 for [Google's (GOOG) (GOOGL)] YouTube and $270 for Twitter (TWTR))," Graham said.
Plus, there's still opportunity from Instagram ads, which are just getting started. Graham expects that platform to "start contributing meaningfully in 2016."
Graham also noted that Facebook can improve its ad technology, building off of the company's wealth of user data.
The one thing holding Facebook's share price back is that its margins are already so high, that there's less opportunity for earnings per share growth, Graham said.
"While we like Facebook's revenue outlook, we note that EPS expansion may not outpace revenue growth, with what seems to be limited operating leverage potential," Graham said.
Nonetheless, adjusting for growth opportunities, he still believes in the company's $230 billion valuation. "Though Facebook currently trades above its historical multiple, we believe it's a relatively reasonable valuation."