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Facebook's stock tanked after earnings — analysts weigh in on why

Heidi Chung
Reporter

Facebook (FB) reported a solid fourth-quarter after the bell Wednesday, but many were left scratching their heads when the stock tanked 7% following the results.

Revenue grew 25% and beat Wall Street estimates and earnings per share of $2.56 also handily surpassed expectations. User engagement, measured by Daily Active Users (DAU) and Monthly Active Users (MAU), showed continued growth, and the social media company’s average revenue per user exceeded estimates at $8.52.

Facebook CEO Mark Zuckerberg speaks during the F8 Facebook Developers conference on April 30, 2019 in San Jose, California. (Photo by Justin Sullivan/Getty Images)

Overall, Facebook met or exceeded expectations across all of the important metrics. So then, why were investors punishing the company’s stock?

Several analysts have explained their ideas.

“We think expectations were high. And they weren’t met. We call this an Expectations Correction – as opposed to a Fundamentals Correction,” RBC analyst Mark Mahaney wrote in a note Thursday. “We’re less near-term constructive. We would expect FB shares to pause. But fundamentally, we believe FB’s very strong ROI will emerge mostly unscathed from the ad targeting changes & FB will benefit from a banner ’20 Ad Year (Olympics, Elections).” Mahaney mantained his Outperform rating but lowered his price target to $255 per share from $270.

Cowen analyst John Blackledge argued that Facebook missed investors’ heightened expectations for the company’s advertising business. “Investors were more bullish than the sell-side consensus into the print, as shares were +8% YTD, with the reported ad revenue growth bogey just above the high end of the range, in our view. Hence shares down 7% [after-hours].” Blackledge maintained an Outperform rating on Facebook stock but lowered his price target to $240 from $245 per share.

Again, it comes down to lofty expectations, according to Loop Capital Markets analyst Rob Sanderson. “We think the stock is inexpensive with a modest premium to the S&P 500 that is not commensurate with its growth premium and plenty of option value in messaging, payments, commerce and other areas. We do however expect the stock will remain under pressure as buy-side expectations come down,” he explain in a note Wednesday evening.

Meanwhile, Piper Sandler analyst Michael Olson believes the stock’s selloff could have something to do with Facebook’s first-quarter guidance. “Q1 revenue guidance is slightly below consensus as management points to the ongoing impact on monetization from ad targeting restrictions,” Olson wrote in a note Thursday. “Expectations were elevated ahead of Q4 results, which may have resulted in unrealistic assumptions for potential EPS upside. Given this challenging setup, it appears the solid, but not overwhelmingly positive results and guidance could weigh on shares.” Olson maintained his Outperform rating on the stock and his price target of $230 per share.

Bottom line, Wall Street thinks investor expectations were too elevated. Sell-side research suggests that Facebook’s fundamentals remain healthy, but the anticipation and expectation from investors headed into the fourth-quarter were perhaps too high to achieve, whether it was about the company’s ad business or guidance.

As of Thursday morning, there are currently 48 Buy ratings, 6 Hold ratings and 3 Sell ratings on Wall Street. The average price target for Facebook stock is $244 per share which is 16% higher from current trading levels.

Heidi Chung is a reporter at Yahoo Finance. Follow her on Twitter: @heidi_chung.

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