Facebook Sinks On Downgrade: Time to Sell FB Stock?
Shares of Facebook FB dipped over 3% Tuesday after MoffettNathanson analysts downgraded FB stock, citing the possibility of increased regulation and lower profits. The move comes as part of a month-long decline in the wake of its infamous Q2 earnings release. So, is it time to sell Facebook stock?
Downgrade
MoffettNathanson lowered its rating for Facebook stock from “buy” to “neutral,” noting that its earnings are expected to be much lower. “We believe that revenue growth deceleration coupled with the company's long-term margin guidance does not provide a meaningful near-term path for outperformance," analyst Michael Nathanson wrote in a note to clients Tuesday.
"Facebook is increasingly under the eye of global politicians and regulators, which will force the company to become more aggressive on spending to show contrition. ... The deceleration in growth, coupled with continued regulatory scrutiny, is a toxic brew for any stock."
The analyst also lowered his price target for shares of FB from $200 to $175. Investors should note that Facebook stock closed Friday at $175.73 per share. “We do not see outsized performance on the horizon as Facebook's core platform is maturing and monetizing Stories may not be the runaway success needed in the near-term to pick up the slack,” Nathanson continued. “Further, expenses are expected to stay elevated as Facebook plays catch-up to secure and refresh its platform.”
Nathanson pointed directly to the company’s own lower operating profit margin guidance as a big reason for concern. Plus, the analyst lowered his EPS estimate for fiscal 2019 from $8.25 per share to $7.90 per share.
Outlook
Tuesday’s downgrade might not come as that much of a surprise for some since Facebook stock has plummeted since the company reported its second-quarter financial results. On top of slowing user growth, many investors sold FB stock because CFO David Wehner said that Facebook expects its operating margins will fall into the "mid-30s on a percentage basis" over the next several years.
Wehner also noted that Facebook expects its “total expense growth will exceed revenue growth in 2019.” The scary part for investors is that Facebook posted an operating margin of 44% in Q2, which was already down from 47% in the prior-year period.
Meanwhile, our current Zacks Consensus Estimate is calling for Facebook’s adjusted Q3 earnings to fall by nearly 7%. The company’s fourth-quarter earnings are projected to dip by 0.45%. Facebook is expected to see its Q3 revenues jump roughly 34% to reach $13.83 billion, while its fiscal 2018 revenues are projected to climb 36.4%.
Facebook is clearly expected to see its revenues continue to surge, but its declining profit margin will pull down profits for a while. This has helped FB’s earnings estimate revision activity trend almost completely downward—in a big way— over the last 60 days, for Q3 and Q4, as well as for fiscal 2018 and 2019.
Bottom Line
Facebook’s earnings revision activity helps it earn its current Zack Rank #4 (Sell) standing. The company’s user growth picture is also somewhat worrisome. Facebook’s user growth slowed last quarter in the U.S., Canada, and Europe. It’s worth pointing out that these regions accounted for roughly 72% of FB’s total Q2 revenues, while only making up approximately 28% of Facebook’s total monthly active users.
Facebook still benefits from its outsized importance to advertisers because FB, and its size—unlike Twitter TWTR or Snap SNAP—offers advertisers access to consumers that are harder to reach during the age of Netflix NFLX and Amazon AMZN Prime. However, Facebook stock might be one to stay away from for now based on heightened scrutiny and shrinking margins.
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