Analysts Like Facebook, But They're Turning on Twitter
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Anticipation is mounting regarding the outcome of the Fed's two-day monetary policy meeting, which concludes tomorrow: Will policymakers decide to begin to scale back the central bank's $85 billion monthly bond purchases? Amid the uncertainty, stocks lost ground on Tuesday, with the S&P 500 and the narrower Dow Jones Industrial Average falling 0.3% and 0.1%, respectively.
The two most prominent social networking stocks, Facebook and Twitter have had spectacular years; however, when it comes to analysts' appreciation, the trend for each of them is now divergent.
This morning, Susquehanna's Brian Nowack upgraded Facebook to positive (i.e., buy) from neutral, raising his price target from $52 to $68. In justifying the upgrade, Nowack wrote that the social networking company "is set to deliver positive revisions and concerns about 'ad load capping' and 'teen' comments are overblown."
Nowack joins a list of analysts touting the stock. According to data from Briefing.com, the past five analyst recommendations on Facebook published prior to today were buy recommendations -- three of which were from analysts initiating coverage of the company and two of which were upgrades. The last downgrade Facebook received, from Argus Research, was back at the end of July.
Nowack presents a compelling case for Facebook's franchise and, usefully, he pinpoints areas of variant perception. On the "teen comments" brouhaha, I absolutely agree -- there is no evidence at present that teenagers are abandoning Facebook in any significant number.
Regarding "ad load capping" -- Facebook has said that its News Feed is too crowded and that it will seek to limit the number of ads it displays -- Nowack sees this is as positive development, as he explained on CNBC today:
It's a good problem to have. The steps they're taking to limit the ad supply impression growth are very good long term -- this is the same playbook we've seen out of Google for many years. And, quite frankly, we've been waiting for other online display players to do this, because in an environment when pricing is still low, like it is on Facebook, and advertising return on investment is still high, the steps that they're taking to limit ad impression growth will actually drive pricing higher, and there is room for Facebook pricing to grow, which basically will mean faster overall revenue growth on the platform.
But what of the positive revisions? Where would they come from? Perhaps from the video ads that Facebook is rolling out on Thursday, as reported in today's Wall Street Journal. Cue Mr. Nowack:
I think that the video numbers still are not in any consensus of Street numbers... The extent to which this test rolls out over the next three months or six months into next year, it's all upside still to come to the model. And when you think about the real kicker from video advertising, more advertising dollars flowing over that platform is going to give you a revenue acceleration, as well as potential margin expansion, because of the high incremental margin of advertising dollars.
Ah, but how much upside? True to his profession, this analyst is ready with an estimate:
[Video ads] could be a very big deal for Facebook because you have that big of an audience, and you start leering on video advertising, which is sold at much higher average cost per thousand impressions. It's not a reach to say that video advertising alone, on an annualized basis, could add $1.1 billion of advertising, which to put it in perspective, in the next year, we think they're going to do $10 billion of advertising. So the idea of adding another $1.1 billion on top of that just from video really adds a lot to the platform.
If he's correct, it's not a stretch to imagine future upward revisions to earnings per estimates, analyst upgrades... which would add momentum to the shares.
And speaking of momentum, that is something Twitter shares have had no shortage of over the past couple of weeks. However, because there is no fundamental explanation behind it, analysts are beginning to turn on the stock, which now sports a valuation that even feverish bulls and stock underwriters are having a hard time justifying. Today, it was the turn of James Cordell of Atlantic Equities, who cut his rating from buy to hold on valuation concerns, while maintaining a $40 price target.
I may be an old-fashioned value investor, but, truth be told, both stocks look expensive to me -- it's just that Twitter's is absurdly so, while Facebook's valuation is somewhere closer to conceivable. However, if the sentiment of the analyst community is anything to go by, it looks like Facebook is better positioned to extend its rally. Twitter burst out of the gates onto the public markets, but that momentum looks increasingly like a burden.
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The article Analysts Like Facebook, But They're Turning on Twitter originally appeared on Fool.com.
Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on Twitter @longrunreturns. The Motley Fool recommends and owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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