Facebook stock is one of the casualties of a tech selloff on Wednesday that so far has also claimed Netflix, Apple, Alphabet and even the poster child of retail, Amazon. However, analysts likely aren’t going to abandon Facebook or any of the other tech giants any time soon, even as investors rotate into other sectors such as financials and telecom.
Facebook’s ad load still on the decline
In a note this week, Barclays analyst Ross Sandler offered a deep dive into the ongoing pricing trends at Facebook marked by the declining ad load and rising cost per thousand impressions. One of the key concerns many investors had regarding Facebook stock centered on the declining ad load, as management cautioned the Street about it. However, investors got over their fears pretty quickly and have pumped Facebook stock up fast all year long, right along with other big tech darlings.
Sandler noted that many of the main impression growth drivers are starting to mature for the core Facebook platform, but they’re still in the early stages in Instagram, Messenger and WhatsApp. He estimates ad load at about 15% for the core Facebook property, and he expects impression growth to remain in the low double-digit range in the medium term. He highlighted the key factors for the low impression growth as single-digit growth in daily active users in the Western market and video ads cannibalizing other News Feed ads.
Facebook has room to drive price
However, the Barclays analyst sees plenty of runway for growth in pricing for ad impressions on Facebook, noting that Google was able to boost prices “at a healthy clip” for more than 10 years through “like-for-like geo and form factor.” He believes Facebook can also drive impression prices higher via innovation in ad products paired with a positive shift in macro ad share dynamics.
He added that programmatic ads in the “open mobile internet” are being beaten by “closed ecosystems with better data and O&O inventory.” Further, he pointed out that Facebook announced big machine learning investments for ads, which he feels will only increase the runway for impression price increases.
Looking into next year
Sandler noted that Facebook will lap the headwinds caused by videos in 2018 but warned that the trend could continue into next year. However, he expects Instagram and Messenger to boost growth in total impressions, so he’s looking for a 15% ad load. He pegs effective cost per thousand impressions in the mid-20% range, which would be a little lower than where it was in the third quarter. As a result, he feels this estimate could end up being too low.
He also said that if all of Facebook’s apps reach a 15% ad load by 2020, there could be “material upside” to the consensus revenue estimate of $82 billion. Barclays has an Overweight rating and $215 price target on Facebook stock.
In intraday trading on Wednesday, Facebook stock fell by more than 3% to as low as $174 per share.