In our initial blog post on Facebook (FB), we noted that the shares could reach $140 based on $4.00 in EPS power in 2017.  After another blowout quarter in 1Q16, 2017 estimates now average over $4.50.  Our confidence in the $140 price target has risen and that level may prove conservative.

FB reported revenue growth of 52% for 1Q16, a phenomenal result given quarterly revenue is over $5 billion.  This was better than even the bulls expected.  Concern had risen form a few analysts that 1Q would miss estimates and those worries increased when Google fell short when it reported a week earlier.  FB continued to execute very well with operating margins also exceeding consensus expectations.  EPS soared to 77 cents vs. consensus of 62 cents as the tax rate came in lower than expected.  Normally, a lower tax rate would indicate poor quality earnings but management had been telegraphing a lower rate and indicated on the conference call that it was here to stay.

Growth in 1Q16 continued to be driven by the core Facebook Newsfeed which is getting a big boost from video.  We continue to see the Newsfeed as similar to broadcast TV networks in that the reach is just massive leading advertisers to buy it almost regardless of activity levels.  Activity levels look good, however, with average daily and monthly users continuing to grow on a global basis.  As we had hoped, Instagram is beginning to contribute meaningfully as well.  Instagram should grow from hundreds of millions to billions in revenue helping to support growth as the law of large numbers leads to moderation in Newsfeed growth.  Much time on the conference call was spent on Messenger which management is wisely trying to get right and grow users before worrying about monetization.  WhatsApp remains behind Messenger on the monetization curve but could be another big product in a few years.

FB also announced an effective 3:1 split by issuing non-voting shares.  This is similar to what Google did a couple of years ago. For FB, the issuance of non-voting shares is happening because Mark Zuckerberg has committed to giving most of his FB stock to charity.  The issuance of non-voting shares will allow him to give those shares away and hold his super voting shares that give him control.  Zuckerberg is dong a fantastic job, so we are very happy to see him maintain control.

FB shares are being held back by rotation form growth to value stocks as concerns about global economic growth, collapsing oil prices, and dollar strength abate.  Northlake is focused on the long-term and remains confident that FB shares will meet our target over the next 12 months.

FB is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  FB is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.