GAM: Facebook R&D investment will deliver for investors

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Mark Hawtin (pictured), fund manager of the GAM Star Technology fund comments on the latest Facebook results.

“Last night’s results demonstrate that Facebook is the fastest growing company of its size in the world. The biggest news was the company’s continued strong growth in mobile advertising. Prices for ads rose 335% year over year and ad impressions fell 65%. Better targeting is allowing Facebook to show less ads overall and direct them to the most suitable users. This is very important for user engagement.

“Although some analysts pointed to margin decline on a published basis as a cause for concern, much of this was attributed to stock based compensation associated with acquisitions. There is still some concern in the market over cost side guidance and so it is good to see the range of cost increase reduced by 500 basis points. However, it is still a very high number and cost growth is likely to continue to be the ammunition of bears.

“Zuckerberg’s visions are expansive and require significant investment, which is why we are seeing a substantial upturn in the spending cycle for the company. We consider this spending cycle very important to understanding and analysing the value of Facebook. Much of the increased spending and capital expenditure is focussed on projects that are many years from yielding meaningful revenues.

“We have analysed the possible impact by trying to spread the R&D costs, essentially through a capitalise and depreciate exercise. This would have the effect of increasing Facebook’s earnings by more than 10%. On a headline basis using consensus earnings, Facebook trades on 29x 2016 earnings and 22x 2017 earnings. Adjusted for both cash and R&D we believe multiples of 23x 2016 earnings and 16x 2017 earnings are more accurate. As the premium investment opportunity in social, this makes Facebook extremely good value.”

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