Facebook (FB) Exits 2018 on a Low Note; Will the Stock Continue to Roll Downhill?


Facebook (FB) stock had to go out of 2018 with a bang. Just a couple weeks before the year’s end, Washington D.C’s attorney general said it plans to sue Facebook over the Cambridge Analytica scandal from the 2016 campaign cycle in which approximately 340,000 people had their data collected without their knowledge. If each person potentially affected accounts for a violation, Facebook will owe $5,000 for each one – totaling to $1.7 billion. At this point, after so many scandals, Facebook users are likely apathetic to any news related to their data.

Following guidance for a slowing growth rate of mid-high single digits for the third and fourth quarters, Elazar Advisors’ Chaim Siegel  suspects each quarter will have a growth rate of 5 – 9% versus the previous quarter. Siegel says the company is “in scramble-mode to stop the bleeding,” which he believes is causing a further slowdown.

“Mark Zuckerberg has said that he knows there will be a mismatch of revenues and earnings in 2019. That means expenses will grow faster than revenues, which means slower margins and likely down EPS. That makes the Street too high. The Street has up earnings for 2019. I think that’s wrong. The problem is their shift to stories requires retraining their users and advertisers to do something that they have not been accustomed to do. Facebook is sold on this change and so they have to wait until the user and advertisers adopt stories. I think Facebook feels forced to make this change trying to drive social interactions. By users only reading content passively, Facebook can lose their positioning as a social platform and competition is too high for passive content consumption. So, Facebook’s view appears to be they have to change user habits from passive consumption back to social interaction. So in the meantime revenues and monetization will slow and so will EPS,” Siegel explains.

Siegel warns that Facebook’s turnaround could take a while and suggests treading carefully because there is risk associated with this stock. All in all, Siegel rates FB stock a Neutral.

Analysts don’t seem to be on the same page with Siegel or heeding the warning from FB leadership. TipRanks analytics shows the stock is still considered a “Strong Buy” on the Street. In fact, out of 40 analysts, 33 are bullish, 5 sidelined and 2 bearish. The consensus price target of $185.78 shows a potential for upside of just about 42%. (See FB’s price targets and analyst ratings on TipRanks)

 

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