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What Wall Street analysts are saying about Facebook's disastrous quarter

Myles Udland
Markets Reporter

Facebook’s (FB) second quarter was one to forget.

On Wednesday after the market close, the company reported revenue for the quarter that missed expectations while also showing user growth that had slowed with its monthly active users missing analysts’ estimates.

In the second quarter, Facebook earned $1.74 per share on revenue of $13.23 billion, while monthly active users totaled 2.23 billion. Wall Street forecast EPS to hit $1.72 per share on revenue of $13.3 billion with active users forecast to hit 2.25 billion.

And on its earnings conference call, Facebook said its revenue growth rates could slow by “high-single digits” in the third and fourth quarters, adding that expense growth was likely to outpace revenue growth next year.

On Thursday, shares of the company were trading down by as much as 19%, taking more than $100 billion off Facebook’s market cap while the drop in Facebook was also weighing on the broader market, notably the tech-heavy Nasdaq and the S&P 500.

Ahead of earnings on Wednesday, Facebook shares closed at a record high.

Facebook CEO Mark Zuckerberg pauses while testifying before a joint hearing of the Commerce and Judiciary Committees on Capitol Hill in Washington about the use of Facebook data to target American voters in the 2016 election. Facebook shares tumbling on Thursday after the company reported a poor second quarter Wednesday afternoon. (AP Photo/Andrew Harnik)

Following this stock crash, Wall Street analysts were mixed, with some seeing Facebook’s stock decline as an opportunity for investors to buy more shares of the company at a discount, while others took this quarter as a sign of trouble ahead of the social network.

Yahoo Finance reviewed reactions from more than a dozen Wall Street analysts on Thursday, and here are some of the highlights.

Stifel

“Facebook just materially reset expectations while blaming currency, GDPR, privacy, stories, and the kitchen sink,” said Scott Devitt and the team at Stifel.

“Mark Zuckerberg has been talking and writing about fixing the business for months now and yet management is just now discussing its impact to financial results. In fact, management had previously suggested there may not be a connection between Mr. Zuckerberg’s commentary and the advertising business. The company had every opportunity to begin to discuss these topics on the 1Q conference call but took a pass on it. It’s infuriating, to be honest. We are sticking with the stock on the sell-off because the damage is likely done and there is a good business here despite management.”

The firm maintained its Buy rating on Facebook stock despite its harsh assessment of management, though it did cut its price target to $202 from $242.

Raymond James

Aaron Kessler and his team at Raymond James downgraded shares of Facebook to Outperform from Strong Buy on Thursday, cutting their price target on shares to $210 from $240 in the process.

“Facebook reported modestly lower 2Q results and provided a softer 2H18 revenue outlook due to FX, promotion of the Stories format, GDPR, and privacy options,” the firm said in its note. “Additionally, Facebook guided mid/long-term operating margins to the mid-30s% vs. our ~45% in 2018. Given the increased near-term uncertainty on revenue growth, slowing user growth, and lower margin forecast, we are downgrading our rating from Strong Buy to Outperform and lowering our PT to $210.”

Pivotal Research

Brian Wieser at Pivotal Research maintained his Sell rating on Facebook and lowered his price target to $140 from $142 following Wednesday’s results, saying that Facebook’s days of 30% growth are numbered.

“As we have written about extensively, the advertising industry — and digital advertising no less — has limits to growth, which we think is the primary factor constraining Facebook’s revenue opportunity,” Wieser wrote. “Deceleration such as management guided toward suggests that while the company is still growing at a fast clip, the days of 30%+ growth are numbered.”

KeyBanc

“We recommend buying FB on the selloff,”  said Andy Hargreaves and the team at KeyBanc.

“The company is proactively shifting its major ad properties to a story-driven experience, which is likely to cannibalize the highly monetizing Feed product. The transition is likely to take several quarters, but we view it as an opportunity to reset and build a more stable long-term platform for both users and advertisers.”

KeyBanc maintained its Overweight rating on shares of the company, but cut its price target to $215 from $245.

Deutsche Bank

“We understand the after-hours reaction as Facebook downgrades its growth outlook and introduces considerable new uncertainty, but we see much of this as a self-inflicted move to push the Stories format, which is a long-term positive for engagement,” said Lloyd Walmsley at Deutsche Bank, who has a Buy rating at a $205 price target on shares of the company.

“The stock could tread water near term but we would take advantage of this transition over the medium term to add to long-term positions.”

UBS

Eric Sheridan and the team at UBS downgraded shares of Facebook to Neutral from Buy and slashed their price target to $180 from $212 following Wednesday’s results.

“After a pronounced selloff in response to [management] comments about forward growth and margin trajectory, we now see the risk/reward as balanced for FB going forward — strong momentum in Instagram measured against regulatory attention, investments to transform/protect ecosystem, and slowing engagement/more mature ad trends at core FB,” the firm wrote.

“In our opinion, the new growth drivers (Instagram, Watch, Stories, Messenger/WhatsApp, VR) frankly aren’t big enough over the short/medium term to alter the decelerating growth and margin pressure profile of the P&L. We have seen the playbook of decelerating growth and margin pressure – normally a valuation argument built on the forward P/E multiple doesn’t win out the day (perfect example was [Google] from 2010-13) especially against a high absolute market cap.”

Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland