'Not as spooky as feared, but ghosts remain': Here's what Wall Street is saying about Facebook's decelerating growth

Ethel JiangOct 31, 2018, 18:05 IST

Photo by Alex Wong/Getty Images

Facebook on Tuesday reported revenue that missed Wall Street estimates and stalling user trends during the third quarter. Shares are up as investors had already prepared for even the worse.

The social-media giant earned $1.76 a share, beating the $1.47 that was expected by analysts, according. Its revenue grew 33% year-on-year to $13.73 billion, but still missed the $13.8 billion that was anticipated.

Meanwhile, Facebook said it had 1.49 billion and 2.27 billion worldwide daily and monthly active users, up from the 1.47 billion and 2.23 billion in the previous quarter. Notably, its daily average users in the US and Canada have flatlined since the Q1 2018 at 185 million.

The company also said it will invest more aggressively, and called for a 40- 50% operating expense growth in 2019 guidance.

Analysts across Wall Street were relieved that users didn't flee the social network in droves after a string of scandals. But they have mixed opinions about Facebook's long-term outlook.

Here's what Wall Street is saying about the quarter:

See 'Not as spooky as feared, but ghosts remain': Here's what Wall Street is saying about Facebook's decelerating growth >>

RBC Capital Markets — 'Facebook still has many growth levers left to pull'

Price target: $190 (from $225)

Rating: Outperform

Facebook is "one of the most 'underlevered' internet companies," said RBC analyst Mark Mahaney. "Facebook still has many growth levers left to pull, not least of which is video advertising."

He added: "Facebook has, so far, effectively addressed one of the most significant overhangs from its IPO days, the lack of Mobile monetization. Mobile Ad Revenue is a material part of the overall Ad Revenue mix (92%)."

"Facebook currently drives EBITDA margins in the mid-40%s. An outlook for increased operating expense investment should drive these down, but we think that increased investment is actually a positive at this point in the company's growth."

Jefferies — 'Not as spooky as feared, but ghosts remain'

Price target: $200

Rating: Buy

"Not as spooky as feared, but ghosts remain," said Jefferies analyst Brent Thill.

"Growth is decelerating, yet 2019 seems to be a pivot point with investment stabilizing," Thill added, "However, the bulk of the investment and deceleration will be accounted for and we view the investments as prudent for long term sustainability."

He continued: "Facebook connects more than 2 billion people from around the world to nearly 6 million advertisers with best in class data and targeting capabilities delivering high quality and relevant advertising to its loyal userbase."

Wedbush — 'Shares remain in the dog house'

Price target: $220 (from $250)

Rating: Outperform

"We expect Facebook to get back on track by the end of 2019, and expect revenues and profits to grow for many years," said Michael Pachter at Wedbush.

"Facebook continues to grow revenue and its user base, but its shares remain in the dog house. The company has great potential to drive revenue from its non-Facebook services (Instagram, WhatsApp and Messenger) as well as a slew of new initiatives, including Oculus and Portal. As these large opportunities materialize, we expect Facebook’s average revenue per user to continue to rise, with solid revenue growth for years to come."

Suntrust Robinson Humphrey —'We maintain a Buy rating'

Price target: $200

Rating: Buy

"We maintain a Buy rating," said Youssef Squali at Suntrust Robinson Humphrey.

"We remain constructive as we believe 1) FB's user base/ engagement proved steady in the face of much head winds, 2) prioritization of the user experience/safety should lead to better monetization LT as marketers adopt the new ad products, 3) marketers continue to see superior ROI, 4) Stories seeing increasing levels of engagement, 5) our belief there is some conservatism in mgmt commentary, and 6) valuation remains compelling."

Pivotal — 'We see downside risks to operating expense relative to guidance'

Price target: $125 (from $131)

Rating: Sell

"We see downside risks to operating expense relative to guidance because of what we think are continuing systemic problems that manifest themselves through an underinvestment in operating resources and efforts to mitigate risks caused by the platform," said Brian Wieser at Pivotal.

"We continue to view the long-run revenue opportunities for Facebook more negatively than much of the investment community does because we see limits to growth for the overall advertising industry. Facebook’s budgets won’t be meaningfully altered by the establishment of new ad products for Stories, unless they appeal to advertisers the company doesn’t already serve comprehensively."

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