BTG Media has downgraded its recommendation on Facebook Inc (NASDAQ:FB) stock from neutral to sell, and set a price target of $16. The research firm's analysts have highlighted the level at which the social media giant relies on ad revenue, compounded with the changing landscapes in advertising, which seem to be focusing on mobile ads as a major reason for their downgrade. Additionally, the analysts have pointed to the fact that Facebook Inc (NASDAQ:FB)'s advancements in the mobile platforms seem to be lacking traction, as a catalyst to the dull outlook for the social media giant.
Facebook Inc (NASDAQ:FB) has been criticized by analysts and media on its inability to forge traction in its mobile platform, and many people think that this could eventually define the social networking giant's downfall. The company generates more than 80% of its revenue from adverts, and BTIG believes that most advertisers are switching to app-based mobile platforms, as these are increasingly becoming more popular among users, as compared to the conventional desktop, web-based platforms.
Additionally, mobile platforms contain smaller screens, which makes it aggravating to users when adverts keep on popping out on display at every click. Facebook Inc (NASDAQ:FB) is designed on the notion of creating social networks, as the CEO, Mark Zuckerberg, has repeatedly emphasized, and not entirely as a money minting website. Therefore, the numerous ads would technically eliminate this notion, which ideally is, the main reason a majority of users join the social network.
Due to the predicaments surrounding mobile advertising, BTIG has estimated Facebook's advertising revenue to grow by 31% from last year's figures, to about $4.14 billion, while 2013 will report 18% growth to just over $4.88 billion. The growth rate for 2012 remains unchanged from the previous estimates, while the 2013 growth rate is down by 3 percentage points, from 21%. Additionally, the Ad revenue growth rate is expected to continue declining in 2014 and 2015.
Facebook Inc (NASDAQ:FB) received nearly 60% of its revenue from Zynga Inc. (NASDAQ:ZNGA), which is not having the best of times. BTIG analysts believe that Zynga's downfall will impact on Facebook's payment revenue adversely, and have subsequently, revised their estimated growth rates downward for 2012 and 2013 to, 37%, and (-6%) from, 56%, and 6%.
Additionally, BTIG analysts believe that Facebook Inc (NASDAQ:FB)'s average revenue per user will experience a slowdown in the next three years, and have, therefore, revised downward, their estimated Average Revenue Per User (ARPU) to $5.16 in 2012, while 2013,2014 and 2015 will report $5.28, $5.33, and $5.41 ARPU respectively; this represents an average of 2 percentage points in declines from initial growth rates of 4% for 2012, 6% for 2013, 3% for 2014, and 4% for 2015.
Interestingly, the analysts are also predicting a slowdown in monthly active users, as exhibited in the reduced annual forecasts for the four year period.
BTIG's price target for Facebook Inc (NASDAQ:FB) is based upon a current market price of about $20.90 per share. The earnings per share for the stock are estimated at $0.47 for the current year, representing a 44.1x P/E ratio.
The forecast price to earnings ratio of 44.1x (based on current price) is very high, compared to the industry average of about 25x. Therefore, BTIG analysts predict a price decline for Facebook to the level of about 33.7x. Subsequently, the analysts have estimated 2012 P/FCF of 24.2, as compared to one based on the current market price of 31.6x.
BTIG calculated its SELL rating for Facebook based on its principle that if a stock is expected to produce a total negative return of at least 15%, then an investor should sell that stock, while a direct reverse of that scenario triggers a Buy decision, according to their model.
At the time of this writing, Facebook Inc (NASDAQ:FB) stock was trading at $20.54 per share, down $0.38, or 1.82% decline from the previous close.