Top Pivotal Research analyst Brain Wieser is out with a research note on four of the biggest internet stocks ahead of 4Q17 earnings. He lifts his price targets on Facebook Inc (NASDAQ:FB), Alphabet Inc (NASDAQ:GOOGL), Twitter Inc (NYSE:TWTR) and Snap Inc (NYSE:SNAP) while offering a cautious glimpse of how these stocks are likely to fare in the coming months and beyond.
Note that Wieser boasts a five-star rating on TipRanks where he scores a 72% success rate and 11.2% average return across 142 stock ratings.
“While we continue to expect long-term top-line growth for each of the four – and for Facebook and Google to expand their already dominant share of the digital ad spending – we think risks to companies in the sector which are generally ignored by investors will have an impact on the sector over time, and should be factored into valuations,” warns Wieser.
Let’s take a closer look at these ‘underappreciated’ risks:
Facebook Inc: A trio of risks to overcome (or not)
In contrast to the very bullish Street, Wieser takes a bearish stance on social media giant Facebook. While TipRanks shows that 30 analysts have published buy ratings on the stock in the last three months, Wieser’s Sell rating comes with an equally negative $147 price target, up from his previous target of $136. However given the stock is currently trading at $187, this suggests considerable downside potential. Furthermore, it is even more at odds with the average analyst price target of $215 (15% upside from the current share price).
According to Wieser, there are three notable risks on the horizon for Facebook. First, the digital ad market is looking increasingly saturated says Wieser. This leaves him concerned that FB’s ad growth rate will not prove sustainable in the longer term. He estimates that Google and Facebook together accounted for 75% of the digital ad market (excluding China) in 2017- which will rise to 80% this year. By 2022, Wieser sees this figure hitting an incredible 91% of the industry’s total. The result of this dominance is that these two companies will be forced to compete for budgets intended for other media (like television). And the problem is that “this will only occur at substantially lower margins than the Google and Facebook currently realize, limiting bottom line growth potential.”
Secondly, FB is also at risk of tougher government policies. Wieser gives the example of Europe where GDPR and ePrivacy are set to become law in May. While it is unlikely that new regulations would significantly impact ad spending, it could well change the way FB manages inventory. At the very least, it is worth keeping an eye out on tighter rules on data use that could impact big internet companies like Facebook and Google.
Most interestingly, Wieser also detects a new risk in the US not widely appreciated related to slowing or declining consumption of Facebook. Indeed, core Facebook consumption has now failed to grow year-over-year for a second consecutive month. Nielsen data on Digital Content Ratings (DCR) reveals that consumption volumes (people multiplied by time spent per person) among over 18’s was down -0.1% year-over-year following a decline of -0.9% in August. Bear in mind that August was the first month for which year-over-year data was available. And for all those that talk about Instagram’s extremely rapid growth rates, Wieser points out that Instagram still accounts for just 1/10th of Facebook’s total.
Alphabet Inc: Saturating the digital ad market at its peril
Like Facebook, Wieser sees Google at risk from a saturated digital ad market. However, unlike FB, Google has the bright light of its “text-focused properties – including the home page, search and Gmail, maps, calendar, play, etc – [where] we can see growth of +50% year-over-year.” At the same time Google is less vulnerable to new rules than FB. The analyst explains that search advertising “seems more likely to be relatively immune to the new rules, which would seem to favor Google on a relative basis.” As a result, he reiterates his Hold rating on the stock but ramps up his price target from $990 to $1090. With the stock now trading at $112 this still suggests a marginal downside from the current share price.
Nonetheless if we look at the Street as a whole, Google retains its ‘Strong Buy’ analyst consensus rating on TipRanks. Out of 21 recent ratings, 18 are bullish and just 3 are hold ratings. With shares now at $1,112, analysts are (on average) predicting upside potential of 6% to hit the $1,178 price target.
Twitter: A niche market player
Wieser reiterates his Hold rating on Twitter while boosting his price target from $19 to $21 (13% downside from the current share price). Twitter is a niche marker player that should nonetheless see growth in 2018 according to Wieser. He explains that the platform continues to demonstrate its relevance to a substantially but select audience daily. If this warmed the heart of investors then Wieser ensures the glow won’t last too long. His parting shot ensures that any optimism is kept firmly within limits: “Of course, we don’t think investors should get too far ahead of themselves on Twitter, as we’re doubtful that the company can grow its top-line beyond the low double digits any time soon.”
TipRanks shows Twitter as having a Hold analyst consensus rating. This breaks down into 3 buy, 15 hold and 5 sell ratings in the last three months. On average these analysts are also predicting that the stock will fall back from its current share price. The average analyst price target of $20.45 stands at a 15% downside from the current share price.
Snap: Negative despite rapid consumption growth
On disappearing photo app Snap, Wieser reiterates his Sell rating but increases his price target to $10 from $8. Even $10 still stands at a big downside from the current share price of almost 30%. Like Twitter, Snap is also a niche player according Wieser who says “Snap will take time to grow into its current valuation given limited market potential”. But it is not all bad news- there is a positive out there for those giving up hope. Consumption of Snap is still growing rapidly, with gains in over 18’s of +126% in September following on +95% gains in August. These figures are way above Snapchat’s larger rival Instagram. For FY2018, Wieser now estimates that Snap’s revenue will grow by +50%. But it will have to overcome several difficulties including selling more expensive ad space:
“Of course, we recognize ongoing challenges, especially as its most desirable ad inventory (on Discover) is both relatively scarce and much lower margin than the less desirable, but more plentiful Snap Ads inventory associated with Stories” says Wieser.
If we take a step back and look at the Street overall, we can see that Snap has a Hold analyst consensus rating. In the last three months analysts have published just 5 buy ratings on the stock compared to 13 hold ratings and 7 sell ratings. Meanwhile the average analyst price target of $13.40 indicates 5% downside from the current share price.