Facebook's Price Target Gets Cropped By MKM

Rob Sanderson of MKM Partners slashed the price target on Facebook Inc FB by $15 to $150 saying that Facebook would be a “challenging stock” near-term as investors digest management commentary on deceleration and spending that in turn may hurt margins.

As the company decides to run out ad load by mid-2017, the growth drivers of Facebook should be Instagram, user growth, engagement levels and ad pricing.

“We think each of these is a material factor, but clearly revenue growth should decelerate from the 50-60% levels the company has delivered the past few quarters,” Sanderson wrote in a note.  

Consensus estimates reflect a deceleration of revenue growth from 52 percent in 2016 to 34 percent in 2017 and 27 percent in 2018.

Sanderson projects Instagram to be 13 percent of incremental ad revenue in 2016 and user growth another 24 percent. For 2017, the analyst expects Instagram to account for 23 percent of incremental ad revenue and 28 percent user growth.

Sanderson compared the P/E multiple trend for both Alphabet Inc GOOGL and Facebook over each company’s tenure as a public company and compared with year-over-year revenue growth.

Facebook’s forward P/E has dropped to 22x, an all-time low, despite reporting 56 percent revenue growth last quarter. On the other hand, Alphabet’s multiple didn't approach 20x until revenue growth had fallen to 30 percent and the global economy was heading into recession.

“We think that the magnitude of multiple compression is overdone and premature,” Sanderson highlighted.

“If FB indeed grows in the 35% range in 2017 with modest margin compression, as consensus implies, we think the multiple could normalize in the high 20’s,” Sanderson added.

Sanderson has a Buy rating on Facebook shares.

At time of writing, shares of Facebook fell 2.5 percent to $116.02.