Wall Street Starts To Turn Against Facebook

By David Cohen 

Wall Street has not been clicking on the like button for Facebook this week, as analysts Carlos Kirjner of Sanford C. Bernstein & Co. and Richard Greenfield of BTIG lowered their ratings for the social network’s stock.

Forbes reported that Kirjner cut his rating on Facebook to “market perform” from “outperform” and lowered his target price to $27 per share from $33, saying that mobile advertising and Facebook Exchange are not growing quickly enough, and writing in a research note:

Facebook’s mobile inventory and Exchange still present significant untapped monetization opportunities, but much of this upside is now in consensus (estimates), and the pace at which these have evolved over the past two quarters justifies some caution. Mobile ad revenues (in the fourth quarter) grew more than 100 percent sequentially but came in below our and we believe investors’ expectations for the seasonally strong fourth quarter. The Exchange reached just 1 billion impressions per day by December, a relatively small — in fact nearly insignificant — number for Facebook. Most important, the 18 percent price-per-ad growth in North America, despite easy comps with virtually no news feed revenue a year ago, suggests that we will need to see a pricing-power inflection for the multiple to expand, or even for it to remain stable, in early 2014 and onward when comps become harder. As a result of the more limited upside we see from here and the increased downside risks, we are downgrading Facebook.

Given the facts we have, we think it is hard to have high conviction that these will work well enough the next 12 months to support the growth trajectory required for the stock to reach the mid- to high-$30s, and hence, we cannot recommend it at this point.

Greenfield was concerned with advertising revenues not meeting projections, with Forbes reporting that he lowered his rating to “sell” from “neutral” and set his target price at $22 per share.

Forbes added that Greenfield projected Facebook’s 2013 revenue at $6.4 billion, compared with other Wall Street estimates of $6.6 billion to $6.7 billion, and those figures for 2014 are $7.4 billion versus $8.4 billion, respectively. He wrote in a research note:

We upgraded Facebook to “neutral” in late November 2012 because we believed advertising revenues were set to notably exceed investor expectations, as we saw Facebook pushing a significantly higher ad load into users’ mobile news feed during the fourth quarter of 2012. Since then, expectations for Facebook have risen notably — the company reported fourth-quarter-2012 revenues slightly above our estimates and talked to significantly higher-than-expected cost growth in 2013 impacting margins. While we are raising our revenue forecasts for 2013 to 2015, we are below consensus, especially in 2014, and our adjusted EBITDA (earnings before interest, taxes, debt, and amortization) estimates are even further below consensus. With revenue and EBTIDA growth set to disappoint, we believe a “sell” rating is now warranted.

Facebook management continues to focus investors on the increased “engagement” with Facebook as consumers shift from desktop usage to mobile usage. Simplistically, with a Facebook application on your phone with push notifications, consumers end up touching Facebook far more often as they transition to mobile usage. Yet, the question Facebook has yet to answer is how mobile is affecting aggregate engagement, meaning total time spent on a monthly basis. We suspect the more consumers shift to mobile, the less total time they are spending with Facebook. While the CPMs (cost per thousand impressions) on mobile are significantly higher (you have to stare at the ads, which are quite large relative to the screen size), we struggle to believe Facebook can continue to ramp the ad load on mobile the way they did in the fourth quarter of 2012.

Readers: Are you bullish or bearish when it comes to Facebook’s stock?

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