Unlike Snap (SNAP) and Twitter (TWTR), Facebook (FB) has more than one huge asset; in addition to the Facebook website, FB also owns WhatsApp, Messenger and Instagram. All three have the advantages of network effects, which means that they get more valuable as more users join them. As a result, it’s extremely difficult for Facebook’s rivals to get traction.
However, the “bad news,” according to Needham’s Laura Martin, is that “Network Effects can act as either a positive or negative valuation accelerator.” And apparently, the negatives outweigh the potential positives.
In a research issued today, Martin downgraded FB stock from Buy to Hold, without suggesting a price target. (To watch Martin’s track record, click here)
Martin commented, “One type of Network Effect is based on “Beliefs” (ie, the more people who believe something the more likely the next person will believe it). Religions often benefit from this type of Network Effect. We believe that growing regulatory, headline and strategic pivot risks are creating a Negative Network Effect at FB, supported by the evidence of 11 recent senior manager departures.”
“We are concerned that regulatory, headline, and strategic pivot risks will negatively impact FB’s valuation more than investors currently believe due to the negative flywheel created by Network Effects, as evidenced by the exit of many important FB executives […] A Negative Network Effect suggests that departures will continue, and since we believe that people are a key competitive advantage of FAANG companies, this implies accelerating value destruction until senior executive turnover ends. We prefer to move to the sidelines until we see senior employee turnover stabilize,” the analyst continued.
Most of the Street is far more confident than Martin’s sidelined stance, with TipRanks analytics showcasing FB as a Strong Buy. Based on 40 analysts polled in the last 3 months, 33 rate a Buy on Facebook stock while 5 maintain Hold and 2 recommend Sell. The 12-month average price target stands at $192.20, marking a nearly 16% upside from where the stock is currently trading. (See FB’s price targets and analyst ratings on TipRanks)