Facebook downgraded because of “toxic brew”

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A report from analysts at MoffettNathanson (MN) looking at Facebook has resulted in the firm downgrading the social media business to “Neutral” (from “Buy”) citing that “revenue growth deceleration coupled with the company’s long-term margin guidance does not provide a meaningful near-term path for outperformance.”

The analysts admit that since it commenced coverage of Facebook in September 2015, we have consistently been above consensus estimates on forward earnings; but now cautions that it is now, for the first time, below Street numbers in the out-years.

MN also warn that last quarter’s (Cambridge Analytica) blow-up at Facebook aside, “the company is transitioning from a frictionless model, in which both user-generated content and advertising were largely unsupervised by human contact, to one with higher investments in third party content (e.g. soccer rights in Southeast Asia and India) and security. Facebook is increasingly under the eye of global politicians and regulators, which will force the company to become more aggressive on spending to show contrition.”

“At the same time, engagement – and monetisation – is shifting from News Feed to Stories, which will be a headwind to revenue growth. Taken together, in the near-term, we expect margin deleverage to slow 2019 operating income growth down to the low teens, which should limit further multiple expansion. The deceleration in growth, coupled with continued regulatory scrutiny, is a toxic brew for any stock.”


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