Facebook has its critics, but sell-side mostly bullish
Facebook (FB) is scheduled to report results of its fourth fiscal quarter after market close on January 29, with a conference call scheduled for 5 pm ET. What to watch for:
1. SELL-SIDE INCREASINGLY BULLISH: This morning, Raymond James analyst Aaron Kessler upgraded Facebook to Strong Buy from Outperform with a price target of $270, up from $230. Kessler expects Facebook to report revenue and earnings upside as his channel checks point to "solid growth." In addition, the analyst's recent survey of 465 internet users points to Facebook retaining its social leadership position with Instagram as the biggest share gainer in time spent. Further, he believes moderating privacy concerns could drive multiple expansion for Facebook in 2020. Kessler finds the stock's valuation attractive at current levels.
On January 24, KeyBanc analyst Andy Hargreaves raised his price target for Facebook to $263 from $240 and made no change to his Overweight rating. In an earnings preview note to investors, Hargreaves said he believes ad spending across the major internet platforms remained healthy in Q4, which should drive solid top-line performance across the space. He expects margin commentary at Facebook to remain consistent and point to improving trends through 2020.
A few days prior, Morgan Stanley analyst Brian Nowak said he believes pools of traditional marketing spending like direct mail and "trade spending," such as couponing and endcap placement, are new sources of dollars for the online advertising leaders, including Facebook. He also believes online advertising penetration is only about 30%, not 55% as some would estimate. Given that backdrop, he remains bullish that Facebook's runway for online ad growth is long and expanding and he raised his price target on the stock to $270 from $250. Nowak, who also said he expects Instagram Stories monetization to be a material driver of growth in 2020, keeps an Overweight rating on Facebook shares.
In December, Deutsche Bank analyst Lloyd Walmsley raised his price target for Facebook to $270 from $260 and called the company a top large cap pick for 2020. The analyst sees the "renewed strength" in the core Facebook app becoming a "critical leg of the story" around the shares in 2020. As this becomes clearer over the next few quarters, investors should gain comfort in terminal value in the core Facebook app, leading to multiple expansion on top of revenue and earnings upside, Walmsley told investors. His updated sum-of-the-parts valuation at the time assumed a higher valuation for core Facebook, he explained.
2. ANOTHER CRITIC: On January 16, U.S. House Speaker Nancy Pelosi criticized Facebook during her weekly press briefing, accusing the company of "schmoozing" the Trump administration out of harsher regulation, the Verge's Makena Kelly reported. "They have been very irresponsible," Pelosi said about Facebook. "I think their behavior is shameful." "Facebook's business model is strictly to make money," she added. "They don't care about the impact on children. They don't care about the impact on truth. They don't care about where this is all coming from, and they have said that even if they know it is not true, they will print it."
3. NO ADS ON WHATSAPP, LESS SPENDING ON WATCH ORIGINALS: On January 16, The Wall Street Journal's Jeff Horwitz and Kirsten Grind reported, citing sources, that Facebook is now backing away from efforts to sell ads in the messaging service. For now the company's focus will be on features allowing businesses to communicate with customers and organize those contacts, marking a reversal of a controversial plan that previously drove the creators of WhatsApp to resign, according to the report.
On January 29, Tom Dotan and Jessica Toonkel of The Information reported, citing a person familiar with the matter, that Facebook is reducing the amount of money it spends on original programs for its Facebook Watch video service. Facebook continues to increase its programming budget for Watch, but is spending less on originals and more on talk shows and licensing clips from TV networks and sports leagues, according to Dotan and Toonkel.
4. LATEST ON LIBRA: On January 21, CNBC's Kate Rooney and Salvador Rodriguez reported that Vodafone (VOD) has left Facebook's Libra Association. "We can confirm that Vodafone is no longer a member of the Libra Association. Although the makeup of the Association members may change over time, the design of libra's governance and technology ensures the Libra payment system will remain resilient," the Libra Association said in a statement, according to CNBC. Other companies that have left the Libra Association include Visa (V), MasterCard (MA), PayPal (PYPL), eBay (EBAY), Stripe, Booking Holdings (BKNG) and Mercado Pago.