Facebook 'Hit Reset' On Expectations: Wall Street Responds To The Lackluster Quarter

Facebook, Inc. FB dropped 20 percent Thursday following its second-quarter earnings call Wednesday. Earnings figures were mixed, with a beat on EPS and miss on sales, but the key figures were Facebook’s daily and monthly active users.

Both grew by 11 percent globally, just below the Street’s estimates. Notably, user counts were flat in North America and dipped in Europe.

Analyst were predictably cautious. Consensus seemed to be that price target cuts are warranted, but the stock’s sell-off was overdone and it remains one to buy.

The Analysts

• Credit Suisse analyst Stephen Ju maintained an Outperform rating and cut his price target from $265 to $225.
• KeyBanc analyst Andy Hargreaves maintained an Overweight rating and cut his price target from $245 to $215.
• Morgan Stanley analyst Brian Nowak maintained an Overweight rating and cut his price target from $215 to $185.
• Nomura analyst Mark Kelley downgraded the stock from Buy to Neutral and cut his price target from $228 to $183.
• Stifel analyst Scott Devitt maintained a Buy rating and cut his price target from $242 to $202.
• William Blair analyst Ralph Schackart maintained an Outperform rating, with no price target offered.

The Street Weighs In

Ju saw Facebook shares trading at a de-risked 2019 EPS multiple after the report.

“We are therefore buyers as we believe that at this point the bias for estimates is to the upside and for the stock to progressively recover over the next two earnings reports,” he said in a note.

Eyeing the remained of 2018, Morgan Stanley’s Nowak noted management implicitly guided Q3 and Q4 revenue growth down to 34 percent and 26 percent annually — well below his own prior estimates. The company blamed new forex headwinds, the new GDPR data privacy rules and increased investment in “Stories” on Facebook and Instagram.

It was this last point that stood out most to analysts, the other two having largely been priced in already by investors.

What's The Story?

Facebook has put increased emphasis on Stories for monetization in the long-term. The feature only had 150 million active users — meaning penetration stands at less than 10 percent — and is monetizing at a slower rate than the traditional news feeds.

KeyBanc expects the transition to cannibalize some of the ad load from news feeds. “But we view it as an opportunity to reset and build a more stable long-term platform for both users and advertisers,” Hargreaves said.

Related Link: Nomura Downgrades Facebook, Says Stock's Negatives Outweigh The Positives

Nomura also hit reset on its model. Although analyst Kelley’s new price target is in-line with the rest of the Street’s, he sees “too much near- to mid-term uncertainty to recommend shares at this point.”

Taking a harsher tone, Devitt expects a “major management credibility rebuild” ahead for Facebook. Devitt accused CEO Mark Zuckerberg of avoiding any mention of how security buildouts would affect finances despite being given several chances on the previous quarter’s earnings call.

Despite the analyst’s frustrations with management, Stifel is “sticking with the stock on the sell-off because the damage is likely done and there is a good business here.”

Shifting Metrics

William Blair also noted that management seemed to be trying to shift the focus from the traditional metrics Facebook is valued by. Management introduced a new figure on the earnings call: the “family-wide” audience. Worldwide, 2.5 billion people used at least one of Facebook’s apps in June.

The core Facebook app has 2.2 billion unique monthly active users alone, and the company’s other three main apps — Instagram, WhatsApp and Messenger — all have user bases over 1 billion as well. The large overlap suggests that even with new privacy data rules, Facebook will have no trouble gathering what it needs for its advertising business.

“We still believe Facebook has among the leading [return on investment] of any ad platform,” said Nowak.

Price Action

Facebook's stock traded about 18 percent lower at time of publication, around $176.52 a share.