After a shaky first few months as a public company, Facebook Inc (NASDAQ:FB) stock started a steady march higher that has continued without interruption for nearly four years.
This week, FB stock once again hit new all-time highs above $120. With its second-quarter earnings due out on July 27, investors have high hopes for another blowout quarter.
Ironically, those high hopes may spell the end of Facebook stock’s meteoric multi-year rise.
FB Expectations Are Sky-High
This week, BTIG analyst Richard Greenfield downgraded Facebook stock from “buy” to “neutral,” and he cited unrealistically high expectations as the main reason.
According to Greenfield, Facebook is still one of the only ways to play the secular shift of ad revenue to the mobile environment. He also notes that BTIG is projecting a staggering 40% year-over-year Ebitda growth from Facebook in 2016. So what’s the problem?
“Investor expectations over the past year have risen dramatically and we now feel the bar is simply too high,” Greenfield concluded.
A Lesson From Netflix
Netflix, Inc. (NASDAQ:NFLX) shareholders know all too well the dangers of high expectations. In Q2, NFLX delivered 31% year-over-year revenue growth and added 1.68 million global subscribers. The stock promptly tanked 13%.
NFLX’s growth numbers may seem impressive on the surface, but the market was expecting more. Facebook shareholders may also soon be in for a rude awakening when it comes to the danger of high expectations.
In the past year, consensus 2016, 2017 and 2018 revenue estimates for Facebook have risen 14%, 17% and 24%, respectively. In that same time, consensus Ebitda estimates are up 13%, 13% and 18%. Hopes are getting higher by the day.
Greenfield made clear in his downgrade note that FB shares are not overpriced at their current level. At a forward price-earnings ratio of 27 and a price-to-free-cash-flow of 31, FB stock likely doesn’t have anywhere near the short-term downside NFLX did. And long-term investors shouldn’t lose sleep if the stock takes an extended breather after a four-year 600% gain from 2012 lows.
FB short seller Andrew Left, however, is convinced that Facebook could end up the next MySpace. Left recently pointed out the popularity of Snapchat among tweens and said that Facebook could be on the verge of losing the next generation of users. Left also noted that FB-owned Instagram is already seeing usage numbers decline.
MKM Partners analyst Rob Sanderson disagrees. This week Sanderson called FB a “must-own stock,” and he sees “significant monetization headroom” through the end of 2017. He highlighted the company’s growth drivers, user engagement and business execution as long-term strengths.
There’s no question that FB investors should expect some impressive growth numbers in Q2. Unfortunately, after two straight blowout quarters, expectations are through the roof.
The short-term fate of Facebook stock and of its four-year rally may rest in the company’s ability to once again beat a bar that is set higher than ever before.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.