Not every analyst is a huge fan of Facebook (NASDAQ:FB). That’s fine. That difference of opinion gives FB stock investors — as well as the rest of the analyst community — plenty to think about.
None are as bearish on Facebook stock as Pivotal Research Group analyst Brian Wieser is, however. Wieser currently sports the lowest of all price targets on the social networking giant’s shares. His estimated value of Facebook stock? A mere $120, which is 35% less than the current FB stock price of $186.
It is, admittedly, outrageous given Facebook’s pedigree and history. And Wieser’s thesis is also more subjective than objective, which most investors tend to dismiss in favor of more numerically-driven calls.
The thing is, he’s got a point loyal owners of Facebook stock may want to at least entertain.
What Wieser Says
Wieser’s been a FB critic for a while. As far back as 2017 he voiced concern that the advertising reach Facebook boasted of the United States’ 18 to 24 year olds was mathematically impossible. Facebook said it had a potential 41 million individuals in this crowd, but the most recent U.S. census reports there were only 31 million people between those ages living in the U.S.
Facebook responded, explaining “Reach estimations are based on a number of factors, including Facebook user behaviors, user demographics, location data from devices, and other factors. They are designed to estimate how many people in a given area are eligible to see an ad a business might run. They are not designed to match population or census estimates. We are always working to improve our estimates.”
While no demographic research is perfect, a ten-million-people overstatement is more than mere rounding error, and it underscores a point Wieser has made more than once. That is, per a note published in October, “the company is not as in control of its business as it needs to be.”
Wieser was specifically referencing a spate of issues that had then-recently surfaced, including accusations of deceptive video-ad metrics and new hints that a data-scraping outfit with Russian ties may have illicitly garnered user data. The bigger point remains the same though. That is, each question that’s raised ultimately dents the social media platforms ability to sell ads.
He’s not changed his mind in the meantime either. In January of this year, Wieser voiced further concern that “the toxicity of the company may also deter commercial partners from choosing to work with Facebook, or otherwise make terms less attractive to Facebook.” The Pivotal Research analyst believes that Amazon.com (NASDAQ:AMZN), of all outfits, could be in good position to swipe some of Facebook’s ad share.
“Despite its current massive size,” Wieser says, “we see Amazon’s opportunities as mostly unconstrained based on a successful track record of capitalizing on consumer and IT department spending.”
The challenge to Pivotal’s point of view is two-fold. First, it lacks specifics and is more philosophical in nature. Second, if it’s going to happen, it hasn’t happened in earnest yet.
Last quarter, Facebook’s top line of $15.1 billion was up 26% from the year-earlier figure of just under 12.0 billion. Were it not for a $3.0 billion charge from legal expenses related to an FTC matter, operating income would have rolled in at $6.3 billion, up 12% from the year-earlier figure of $5.6 billion. The number of daily users reached another record of 1.562 billion, and the average revenue per user was up year-over-year from $5.53 per quarter to $6.42.
Something has changed though. The company’s cost of revenue grew to 19% of its total sales, moving to its highest rate for the past eight quarters.
One quarter doesn’t make a trend, but all trends start with one quarter’s worth of data. If it’s getting tougher to sell ad space, the company’s ‘cost of revenue’ line is one place the shift would materialize first.
And that’s happening on the eve of another sweeping change that Facebook has been forced by societal pressure to make. Facebook is about to unveil a ‘clear history’ feature to its users that will effectively delete the valuable browsing data each of those members has created about themselves that’s then sold to advertisers seeking highly-granulated information.
Advertisers who may already be less-than-impressed with Facebook’s platform will now have to settle for even less-specific user data, shoving Facebook into a corner Wieser has long feared the company would paint itself into by overly aggressive and misguided practices.
Then there’s growing governmental regulation. France is the latest nation to put Facebook’s operation under the microscope, effectively writing Facbook’s hate-speech policies for the company. More such rules are now sure to come, opening the door to heavy-handed government control no publishing platform truly wants to allow.
Bottom Line for FB Stock
Even so, Wieser concedes that Facebook’s problems are fixable. Whether the company is ready so or not remains in question.
Case in point: To its credit, the social media outfit just raised the bar on what sort of streaming video content would be allowed on live streams following Facebook’s part in airing March’s mass shooting in New Zealand. The decision arguably comes too late though, confirming Wieser’s take from October that concluded:
“The underlying problem that we see is that the company has been so focused on growth at any cost that it has failed to sufficiently invest in processes that might anticipate problems, acknowledge problems fast enough or fix problems fast enough.”
Sloppiness and a lack of forethought are difficult habits for a corporation with its own culture to change. If Facebook doesn’t, it’s only a matter of time before that failure comes back to haunt the company.
That could easily drag FB stock back to $120, even if the target isn’t accompanied by supporting math.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.