Shares of Facebook (FB) are in focus on Thursday after an analyst at Stifel upgraded the stock to Buy, citing the company's "strong" core business and attractive valuation. Meanwhile, his counterpart at HSBC initiated shares with a Reduce rating, citing a "huge regulatory overhang."
STIFEL TURNS BULLISH: Stifel analyst John Egbert left the Facebook sidelines and upgraded shares to Buy from Hold and raised his price target to $240 from $215. In a research note to investors, Egbert highlighted that in the third quarter, Facebook saw its first improvement in daily engagement in the past two years, with signs of strength in the U.S. and Canada, which had been a region of concern earlier in the year. The company also saw its core Facebook news feed serve as the top driver of ad impression growth during the quarter, Egbert said.
The analyst stated that he believes Facebook will continue to take share of the global online ad market, driven by audience growth, ad product innovation, enhanced targeting and greater ROI measurement and attribution tools for advertisers. While mature monetization of the non-Instagram platforms may still be years away, Egbert said they carry "considerable" optionality as potential drivers of future revenue growth. He further stated that global scrutiny on Facebook's business practices has had little impact on the business to date, though further privacy regulation and/or antitrust scrutiny is likely to continue to weigh on the company's multiple. However, he said that at current levels, Facebook shares appear extremely inexpensive relative to growth and earnings growth should be sufficient to drive shares to healthy near- and long-term returns. Egbert also views Facebook's valuation as attractive relative to peers. The analyst predicted 20% plus year-over-year revenue growth is fiscal 2020 and 15%-20% growth in FY21-FY23.
HSBC FRETS REGULATORY OVERHANG: While Stifel's Egbert took a bullish stance on Facebook, Nicolas Cote-Colisson, his peer at HSBC, took the opposite viewpoint, initiating shares with a Reduce rating and $178 price target. In a research note of his own, Cote-Colisson said that a growing numbers of policy makers and regulators are determined to take decisive action against Facebook. The analyst believes sustaining Facebook's pace of growth "will get harder" and he views current consensus estimates as "overly ambitious." He noted that this is "not because we identify any inherent shortcomings" in Facebook's business plan or powers of execution, but instead reflects his believe that regulatory authorities in the U.S. and Europe are becoming progressively more concerned about the company's dominance. He also contended that Facebook's pace of growth is becoming a risk factor, as it is likely to accelerate scrutiny and intervention.
Facebook faces an "immense regulatory overhang," wrote Cote-Colisson, who finds that the overhang could have an impact equivalent to 38.5% of the company's current valuation. The analyst also noted that the fact that it is not currently making much impact on Facebook’s share price should not be taken as giving the "all clear" signal.
PRICE ACTION: In morning trading, shares of Facebook are up 0.6% to $199.86.
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