Facebook Inc (NASDAQ:FB) stock tumbled on Thursday and Friday even though the social media firm shattered estimates for the third quarter. As has been the case for quite some time, multiple analysts boosted their price targets for Facebook Inc (FB) stock following the company’s third-quarter earnings report. However, unlike recent quarters, investors have been unloading the shares in ultra-heavy trading as they flee the company’s next investment cycle.
Results outweigh spending
The stock initially climbed after the numbers were released, but they reversed course when management confirmed that they are indeed planning on spending more money next year. It’s looking a bit like the love/hate relationship investors have with Amazon stock. They love the company and its stock, but they have a knee-jerk reaction every time the online retailer says it’s going to spend money. On the other hand, Facebook Inc (FB) doesn’t have the razor-thin margins Amazon’s retail segment does.
Deutsche Bank analyst Lloyd Walmsley noted that Facebook Inc (FB)’s improved targeting drove a 35% increase in effective cost per thousand impressions. He also pointed out that the company continued improving its cost management “while sensibly testing and investing in its likely next pillars of growth,” which include Instagram, video ads and Messenger.
He views the company’s guidance for higher operating expenditures in 2018 as mostly a way to keep expectations for the year “in check.” He compared it to the company’s commentary on deceleration in ad growth for this year, a theme management repeated in several earnings calls even though in the end, the lower ad load didn’t have any major impact.
Facebook Inc (FB) stock price target boosted by Morgan Stanley
Morgan Stanley analyst Brian Nowak bumped up his price target for Facebook Inc (FB) stock from $195 to $200 and maintained his Overweight rating following the earnings release. He sees no problems with the company’s continued investments, declaring that the company is doing so from a “position of strength.”
He explained that the 19% beat on GAAP EBIT versus his estimate demonstrates “how early it is in the platform’s monetization and potential earnings power.” The social media firm also beat on free cash flow expectations at $4.4 billion, which was about 38% better than expected. Nowak said Facebook Inc (FB) converted 42% of its revenue into free cash flow, and described its conversion rates as “impressive and stable” as they have averaged 43% over the last two years.
Further, he noted that the company has kept its free cash flow this strong and stable even as it invests “aggressively” in headcount, improving ad measurement, augmented reality and virtual reality, videos, Messenger, WhatsApp, Aquila, and other areas. He believes the company’s investments will eventually widen its lead over other platforms and “lead to sustained stronger cash flow growth.”
Video highlighted in Facebook’s earnings
Macquarie analyst Benjamin Schachter highlighted Facebook Inc (FB)’s investments in video in his note on Facebook Inc (FB)’s third-quarter earnings results. He raised his price target for Facebook Inc (FB) stock from $190 to $205 and maintained his Outperform rating on it, noting that security and investment would take earnings-related headlines, although he feels that the company’s video strategy is the most important takeaway.
He explained that Facebook Inc (FB) “is going forward full steam” with its initiatives aimed at driving “more interactive, community-focused video.” He believes that short-form videos and possibly sports will drive the first “wave of seeded content.”
Facebook Inc (FB) stock fell by about 1% in early trading on Friday, falling as low as $176.71.