Facebook has been under intense pressure in recent weeks from an investigative reporting series by The Wall Street Journal, heated Congressional hearings and intensifying talk of how regulators might rein in the power of the social networking giant. But what would really hurt the social media giant with investors is a bad quarter, and one prominent analyst thinks there’s danger lurking in September quarter results.
Evercore ISI analyst Mark Mahaney late Thursday added Facebook (ticker: FB) to his firm’s “tactical underperform list,” seeing risks in the company’s third-quarter earnings report, due after the close of trading on Oct. 25.
For one thing, Mahaney writes that he has become more cautious on the online advertising sector generally—including Alphabet, Snap, Pinterest and Twitter in addition to Facebook—given tough comparisons with strong quarters a year ago combined with a “difficult” online retail environment.
“Last year, most of the online ad names we cover including Google, Facebook, Pinterest and Snap called out surging e-commerce demand as being a meaningful driver of ad revenue on their platforms,” he writes. “Now we believe the reverse is likely to occur and therefore have a similarly negative impact on their fundamentals.”
Among other things, Mahaney asserts that there’s been a temporary shift of some purchasing back to offline retail—and that offline outperformed online in the third quarter as more consumers returned to physical stores. He also says that rising inflation from higher wages and cost of goods is likely to have a negative effect on retailer profitability, which could translate to less spending on advertising.
Mahaney thinks retailing is a top three ad category for both Google and Facebook, and that gaming—which he says is particularly affected by Apple’s crackdown on targeted advertising—may also be a top three category for Facebook.
Meanwhile, Mahaney thinks the Street is being too optimistic about expense growth at Facebook in 2022. He says the Street sees 23% growth in expenses. But Mahaney believes that 28% to 35% growth would be a more reasonable range, and that the company could guide to the 32% to 37% range, given heavy investment in artificial and virtual reality and potentially increased focus on privacy, platform health and safety.
Not least, Mahaney sees a possibility that CEO Mark Zuckerberg responds to recent controversies by suggesting that the company will shift resources to focus more on addressing privacy and safety issues, and less on new products and services. “Under this scenario we could see Facebook shares trading off materially as investors trim their growth estimates for next year and may become incrementally more worried about competition from platforms like TikTok as Facebook takes its foot off the gas,” he writes.
Mahaney still likes Facebook shares long term—he keeps his Outperform rating and $450 price target—but thinks the third-quarter report will prove crucial to investors. He expects some clues on the health of the ad market when Snap reports results on Oct. 21.
Facebook is down 1.7%, to $323.01.
Write to Eric J. Savitz at [email protected]
