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Revising Facebook's Fair Value

Three months ago, we reaffirmed our $90 price target on Facebook (FB). We have revisited that price target, and have lowered our target to $85 per share.

In FY2014, the company beat analyst earnings estimates in each quarter, summing to a total beat of $0.28. Let's assume FB can beat by half of that much in FY15 and FY16, representing slowed growth (we don't believe FB's business reasonably warrants a sustained 50%+ EPS growth), while still accounting for FB's continued outperformance.

This implies growth rates of roughly 90% and 30% in FY15 and FY16, respectively, on top of 83% growth in FY14.

If we apply a regression analysis to these EPS growth rates since 2013 (FY14, FY15, and FY16), we can see that EPS growth is expected to dramatically decline before stagnating above 0%.

(click to enlarge)

We believe this reverse hockey stick chart accurately represents Facebook's growth going forward,… Read More …