Needham: Facebook No Longer A Buy Amid A 'Negative Network Effect'

The bullish case for Facebook, Inc. FB's stock has come to an end, according to Needham.

The Analyst

Needham's Laura Martin downgraded Facebook from Buy to Hold with no price target.

The Thesis

Needham's multi-year bullish stance on Facebook's stock can no longer be justified for three key reasons, Martin said in a research report. These include:

1. A negative potential impact to financial metrics from the company's recent strategic shift towards privacy and encrypted messages;
2. Ongoing risks of regulations; and
3. The recent terrorist attack in New Zealand makes it clear "horrific" content can't be blocked at 100 percent.

These concerns combine to create a "negative network effect" that could serve as a means of destructing shareholder value, according to Martin. This phenomenon already resulted in 11 senior Facebook managers leaving the company, most recently Chief Product Officer Chris Cox.

Additional high-level executive departures at Facebook are likely. An ongoing turnover of important managers serves as another concern for shareholders as employing the best people is a needed competitive advantage of FAANG companies who are competing against each other to drive growth.

Bottom line, Facebook is in a weaker position to "win" if it distracted with continued management turnover and simultaneously navigating through regulatory and headline risk distractions, the analyst wrote.

Price Action

Shares of Facebook were trading lower by 2.5 percent at $161.85 Monday morning.

Related Links:

Bank Of America Lowers Facebook Price Target, Remains 'Constructive' On The Stock

Nomura Instinet Upgrades Facebook, Says More Regulation Will Be 'Net Positive'