Shares of Facebook (FB) are under pressure as Needham analyst Laura Martin downgraded the stock to Hold as she sees the company's strategic pivot toward privacy and encrypted messages, the growing risks of regulation and "horrific" events like those recently in New Zealand creating a "negative network effect." Cutting his price target on the stock to $187, her peer at Bank of America Merrill Lynch argued that Facebook is faced with more "uncertainty" after its CEO Mark Zuckerberg disclosed a vision that is more sensitive to investors' privacy concerns.
STRATEGY PIVOT, REGULATORY RISKS: In a research note to investors, Needham's Martin downgraded Facebook to Hold from Buy as she worries about the negative financial impact of the company's strategic pivot toward privacy and encrypted messages, growing risks of regulations, and horrific images uploaded to Facebook like those related to the recent New Zealand events that are technologically difficult to block at the 100% level and which hurt the brand. Further, the analyst said that she is concerned that regulatory, headline, and strategic pivot risks will negatively impact Facebook's valuation more than investors currently believe due to the negative flywheel created by network effects, as evidenced by the exit of many important executives. A "negative network effect" suggests that departures will continue, and since she believes that people are a key competitive advantage of FAANG - Facebook, Apple (AAPL), Amazon (AMZN), Netflix (NFLX) and Google (GOOG; GOOGL) - companies, this implies "accelerating value destruction" until senior executive turnover ends, Martin contended. Overall, the analyst prefers to move to the sidelines until she sees senior employee turnover stabilize. Meanwhile, her peer at Bank of America Merrill Lynch lowered his price target on Facebook to $187 from $205. Analyst Justin Post argued that the company is faced with more "uncertainty" after its CEO Mark Zuckerberg disclosed a vision that is more sensitive to investors' privacy concerns. The analyst questioned whether the subsequent departures of Facebook's Chief Product Officer Chris Cox and the head of WhatsApp development Chris Daniels were related to the management's evolving vision, adding that the company's three-year growth trajectory may be altered by its "more privacy centric platform." Post reiterated a Buy rating on Facebook's shares.
ABLE TO MANAGE UNCERTAINTIES: Commenting on Facebook's recent management departures, Mizuho analyst James Lee told investors that he believes the company can manage the uncertainties given its deep bench, similar to Google. The changes represent a sense of urgency to accelerate product development as traffic shifts to messaging due to a preference for privacy, he contended, adding that the product roadmap for Messenger includes search to monetize small and midsized business, and gaming based on Tencent (TCEHY) WeChat's success. The analyst reiterated Facebook as a top pick, with a Buy rating and $210 price target, on "attractive" valuation, catalysts in the second half of 2019 with easier comps and Instragram Stories gaining price leverage, and longer-term upside for messaging.
LOOKING TO EMULATE WECHAT ECOSYSTEM: In the wake of recent Facebook's employee departures, product announcements and regulatory risk, Oppenheimer analyst Jason Helfstein said he views WhatsApp and Instagram's founders' departure as related to those products being integrated into Facebook. Chief Product Officer Chris Cox's departure appears to confirm Zuckerberg is likely to purse a more aggressive product refresh, he contended. Additionally, the analyst believes that Facebook wants to emulate WeChat's ecosystem, allowing information sharing, communications and commerce in a single application. Lastly, Helfstein views Facebook's announcement of the "Clear History" tool as a way to get in front of potential U.S. and international regulation of consumer internet data. The analyst reiterated an Outperform rating and $195 price target on Facebook's shares.
PRICE ACTION: In morning trading, shares of Facebook have dropped almost 3% to $161.68.
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