Analyst Peter Stabler of Wells Fargo gave his insights on internet giants Facebook Inc (NASDAQ:FB) and Twitter Inc (NYSE:TWTR) and Alphabet Inc (NASDAQ:GOOGL) ahead of second-quarter earnings. Stabler is concerned about a slowing pace of spending for analog and digital advertising. On top of this, the analyst believes there are company-specific concerns, which he delves into below.
Facebook has outperformed the S&P 500 by 7% since it last reported earnings in April. The analyst credits this to its Live video product, the continued growth of Instagram and positive commentary from marketers. Nonetheless, Stabler is concerned about the user and engagement growth of competitor Snapchat.
The analyst singles out Instagram as a major discussion topic in Facebook’s upcoming earnings report. Investors are pleased with the continued growth of Instagram’s monetization and the analyst believes that FB’s integration of Instagram as a smart decision that will help the platform reach more users. He also thinks that adding Instagram into FB’s ad-buy system “means the likelihood of investors receiving Instagram revenue data remains remote.”
Facebook Live has continued to show promise, but the analyst expects the company to take a “cautious approach to monetization.” Live content presents risks for marketers and he believes that potential partners will wait to see how successful Live is over a longer period of time before agreeing to sponsorships.
Stabler then discusses Messenger’s new bot platform and gives a first hand account of how it works. He details how it updated him on relevant information ahead of his flight faster than he received the equivalent information to his Gmail. While the product seems promising, the analyst anticipates investors to question its path to monetization. On the contrary, he doesn’t believe investors will worry about WhatsApp’s lack of monetization, but he explains this could change if Facebook’s advertising business underperforms.
Lastly, the analyst expects Facebook’s algorithm change to prioritize family and friend content over publishers to be received in both a positive and negative light. On one hand Stabler believes that the number of news posts has increased and this change will help “rebalance the distribution of content.” On the other hand, investors may interpret his change as a sign that Facebook believes user engagement is declining and it feels pressured to make a change.
Stabler is lowering his estimates for the second half of 2016 and 2017 due to a stronger dollar. For 2016E he lowered his revenue estimate by 0.4% and by 0.6% for 2017E.
The analyst expects Facebook to “be the leading share beneficiary of funds flowing to social and mobile platforms.” Therefore, he maintains his Outperform rating with a valuation range of $145 to $150.
According to TipRanks, out of the 38 analysts who have rated Facebook in the past 3 months 36 had a Buy rating and 2 had a Hold rating. The average 12-month price target for the stock is $147.71, marking a 22.47% upside from current levels.
Twitter has mostly kept up pace with the market since its last earnings report. There was a recent hike in its price, but the analyst credits this to rumors of a possible acquisition from Microsoft. He adds that he does not believe there is a logical near-term buyer for Twitter due to its current challenge of re-engaging users.
This past quarter saw Twitter implement many changes that it hoped would make the Twitter experience easier for the user. These changes include, but are not limited to, the elimination of user addresses and attached media titles, getting rid of the requirement to use @ before a users name and the addition of a curated timeline. While the analyst applauds the good intentions of these changes he does not believe they will change the perception among users that Twitter is “not worth the effort.”
Twitter has also ramped up its live programming, agreeing to deals with the NFL, NCAA sports, political conventions and Bloomberg West. The analyst applauds Twitter’s effort to have a “concentrated strategic effort,” but he doubts this will lead to a larger and more engaged user base. Stabler also believes that although Twitter was first to the video market with its acquisition of Vine and Periscope, Facebook and Snapchat have slowly begun to take away this market from Twitter.
Lastly, Stabler points to Twitter’s reorganization of its Board as a necessary move in order to get “new eyes” on its product offering, but ultimately he expects this change to have a minimal short-term impact. He thinks that Twitter’s core product hasn’t experienced the necessary innovation to maintain its users. He adds that a major goal for Twitter should be to “improve engagement metrics.”
The analyst is lowering his revenue forecasts for 2016E and 2017E due to a stronger dollar and is maintaining his Market Perform rating and valuation range of $15 to $16 for the stock.
According to TipRanks, out of the 29 analysts who have rated Twitter in the past 3 months 31% had a Buy rating, 55% had a Hold rating and 14% had a Sell rating. The average 12-month price target for the stock is $18.84, marking a 2.78% upside from current levels.
Shares of Alphabet have underwhelmed since its 1Q’16 earnings report due to concern about traffic acquisition costs, TAC, growth and the pace of digital video against the traditional TV market.
The analyst expects that the upward TAC rate will return to a normal level in 2017 with Sites TAC increasing 20 bps YoY and Network TAC increasing 80 bps YoY. Stabler also believes that investors should encourage Alphabet’s shift to mobile monetization because it shows that its mobile product improvements are working.
The analyst also notes that he thinks “Google continues to push mobile search innovation and believe that product improvements” will minimize the difference between mobile and desktop success. With regards to video, the analyst writes that the updated Nielsen demographic quintiles will support a secular shift, which he believes YouTube is best positioned for.
Stabler does agree with investors concerns regarding Facebook’s Messenger platform. He notes that Google may be unable to keep up with Facebook’s growth in the messaging market with Messenger and WhatsApp.
The analyst states that Google remains the world’s dominant search provider and believes the company will be able to take advantage of the “structural evolution of mobile computing/content consumption, brand advertising, and e-commerce.” He is also optimistic about Alphabet’s ability to be a major player in wearable computing and automotive technology.
The analyst slightly lowered his 2Q estimates leading to a decline in EPS by $0.03 to $8.02. He also maintained his Outperform rating for the stock with a valuation range of $900 to $925.
According to TipRanks, all 34 analysts who have rated Alphabet in the past 3 months have had a Buy rating. The average 12-month price target for the stock is $911.71, marking a 21.01% upside from current levels.
TipRanks shows that Stabler has a yearly average return of 22.2% and a 68% success rate. The analyst has a 57.7% average return when recommending Facebook, a 37.5% average return when recommending Twitter and a 0.7% average loss when recommending Alphabet. He is ranked #250 out of 4,057 analysts.