Is Facebook Inc (NASDAQ:FB) a good stock to buy? At least two investment banks in the past week are confident that it is indeed a great stock to buy. Today, Piper Jaffray analyst Gene Munster reiterated his firm’s “Overweight” rating on the world’s largest social networking company’s shares, with a heightened price target of $120 per share from its previous $92 target. The new price target assigns a considerable 45% upside to the shares based on Friday’s closing price, and those shares are up by 2.44% today. Last week, the same optimistic sentiment was expressed by RBC Capital Markets, with analyst Mark Mahaney reiterating an “Outperform” rating on the stock with a price target of $105 per share. Vital to the confidence of both analysts in Facebook Inc (NASDAQ:FB) is their belief that the technology behemoth has room to grow. In fact, both of them peg Street estimates as cautious. Mahaney sees Mark Zuckerberg’s creation as currently having the same revenue base as Google Inc (NASDAQ:GOOGL) had in 2007. He argues that for the next year, the Street sees Facebook having 34% growth whereas Google sustained 47% growth with the same revenue base.
Before we proceed, a quick word on why we track hedge fund activity. In 2014, equity hedge funds returned just 1.4%. In 2013, that figure was 11.3%, and in 2012, they returned just 4.8%. These are embarrassingly low figures compared to the S&P 500 ETF (SPY)’s 13.5% gain in 2014, 32.3% gain in 2013, and 16% gain in 2012. Does this mean that hedge fund managers are dumber than a bucket of rocks when it comes to picking stocks? The answer is definitely no. Our small-cap hedge fund strategy – which identifies the best small-cap stock picks of the best hedge fund managers – returned 28.2% in 2014, 53.2% in 2013, and 33.3% in 2012, outperforming the market each year (it’s outperforming it so far in 2015 too). What’s the reason for this discrepancy, you may ask? The reason is simple: size. Hedge funds have gotten so large, they have to allocate the majority of their money into large-cap liquid stocks that are more efficiently priced. They are like mutual funds now. Consider Ray Dalio’s Bridgewater Associates, the largest in the industry with about $165 billion in AUM. It can’t allocate too much money into a small-cap stock as merely obtaining 2% exposure would really move the price. In fact, Dalio can’t even obtain 2% exposure to many small-cap stocks, even if he essentially owned the entire company, as they’re simply too small (or rather, his fund is too big). This is where we come in. Our research has shown that it is actually hedge funds’ small-cap picks that are their best performing ones and we have consistently identified the best picks of the best managers, returning 142% since the launch of our small-cap strategy compared to less than 60% for the S&P 500 (see the details).
The RBC Capital Markets analyst sees video and Instagram as key growth engines for Facebook Inc (NASDAQ:FB) in the coming quarters. He estimates that autoplay video ads and Instagram will generate over $3.4 billion in incremental revenue, and over $0.40 in incremental EPS for 2016. For 2017, he estimates that Messenger and WhatsApp will add over $2.2 billion in incremental revenue and more than $0.25+ in incremental EPS. He adds in his note that the Oculus Rift virtual reality headset could potentially add a further $500 million or more to the social networking company’s topline in 2017.
Piper Jaffray’s Gene Munster agrees with Mahaney that virtual reality, particularly Facebook Inc (NASDAQ:FB)’s play in the segment with Oculus VR, is an opportunity just waiting to be tapped. He said in his note that Piper Jaffray expects human interaction to move from smartphones and computers to virtual reality in the next decade. “Big picture: Oculus is a valuable insurance policy, and gives us greater confidence in Facebook’s ability to sustain usership and revenue growth across its portfolio of products over the next 10+ years which is a positive for FB’s multiple,” Munster writes.
As optimistic as RBC Capital Markets and Piper Jaffray are in Facebook, hedge funds tracked by Insider Monkey also appear to be very positive in their outlook about the company. Facebook Inc was in 129 hedge funds’ portfolios at the end of the first quarter of 2015. There were 118 hedge funds in our database with Facebook positions at the end of the previous quarter.
In terms of insider transactions, there were minor sales of the company’s shares by insiders this month. Chief Technology Officer Todd Michael Schroepfer sold 50,000 of his shares this month. Chief Product Officer Christopher Cox did the same to the tune of 36,934 shares. Vice President, General Counsel and Secretary Colin Stretch also sold 3,000 shares in June.
Now, let’s look at how hedge funds have been trading Facebook Inc (NASDAQ:FB).
Hedge fund activity in Facebook Inc (NASDAQ:FB)
By the end of the first quarter of 2015, a total of 129 of the hedge funds tracked by Insider Monkey were long in this stock, a change of 9% from the previous quarter. In terms of total value of holdings, however, hedge funds tracked by Insider Monkey reduced their total holdings to $7.09 billion by the end of the first quarter of 2015 from $7.9 billion at the end of the last quarter of 2014, despite a share price increase of 5.67% during the quarter. This does represent some bearishness, suggesting funds collectively sold off about 15% of their Facebook shares despite more funds having positions in the stock.
When looking at the hedge funds followed by Insider Monkey, Lone Pine Capital, managed by Stephen Mandel, holds the most valuable position in Facebook Inc (NASDAQ:FB). Lone Pine Capital has a $666.5 million position in the stock, comprising 2.5% of its 13F portfolio. On Lone Pine Capital’s heels is Philippe Laffont of Coatue Management, with a $650.2 million position. The fund has 6.2% of its 13F portfolio invested in the stock. Other hedgies that hold long positions consist of D. E. Shaw’s D E Shaw, Israel Englander’s Millennium Management, and Phill Gross and Robert Atchinson’s Adage Capital Management.
Furthermore, Renaissance Technologies, managed by Jim Simons, initiated the biggest position in Facebook Inc (NASDAQ:FB) during the first quarter of this year. Renaissance Technologies had $217.6 million invested in the company at the end of the quarter. Robert Pohly’s Samlyn Capital also initiated a $74.5 million position during the quarter, while Alex Sacerdote’s Whale Rock Capital Management, Rob Citrone’s Discovery Capital Management, and Glen Kacher’s Light Street Capital all opened new positions of their own.
With the very positive outlook reiterated by RBC Capital Markets and Piper Jaffray along with confidence from more and more hedge funds going long in this stock, we think it’s time to be long on Facebook Inc (NASDAQ:FB) also.