Facebook stock usually gets rave reviews from analysts, but one firm has named the social network its “least preferred stock.” Interestingly, this is the same firm that bucked another trend bydowngrading Netflix, which recently has earned a plethora of price target increases from other firms.
Facebook rated sell
Societe Generale rates Facebook as a Sell despite the company’s continued momentum. Analysts Simon Baker, Christophe Cherblanc and Laurent Picard expect Facebook’s momentum to begin slowing. They started covering the social network’s stock in January with a Sell rating and have been surprised “by how little pushback” they have gotten from investors for that rating.
They list three main reasons to be concerned about Facebook. For one thing, Wall Street has been excited about the social network’s rapid growth in mobile ad revenue. Mobile made up about 73% of the company’s total ad revenue, and the Societe Generale thinks this enthusiasm could be premature.
Falling share of mobile time
They note that Facebook has seen its share of U.S. consumer time spent on Android and iOS devices fall from 18% in 2013 to 17% last year. They believe this suggests that Facebook’s reach is being diluted by the growing number of available mobile apps even though the social network’s user count continues to increase.
Second, the analysts believe Facebook bought WhatsApp because of this reach dilution. The social network paid $19 billion or 10% of its capital to buy the messaging app. Also the company has focused on building a suite of apps, and the Societe Generale team expects investment in apps to continue going forward.
Third, they say consensus estimates for growth in users, revenue and EBITDA, plus the 51 Buy or Hold ratings on Facebook from other firms, suggest that Wall Street “has baked in a ‘survivor bias’ notwithstanding several potential destabilising risks to its user momentum.”
Facebook similar to Google in 2007?
The analysts also drew comparisons between where Facebook is now and were Google was in 2007. For example, they note that Google was trading at 11 times EV/ sales, while Facebook is now at 13.6 times 2015e. Also Google was recording a 52% year over year growth rate for revenue, while Facebook is expected to grow its revenue 40% this year. Third, they said in 2007 Google “had five of the best years ahead of it,” and they think Facebook does as well right now.
The problem for Facebook is that Google shares declined 65% and then took five years to recover. Graph is courtesy Societe Generale:
Because of these factors, they now name Facebook their “least preferred stock.” Despite their ultra-pessimistic view of Facebook, they bumped up their price target slightly from $65 to $68 per share.