Facebook Has More Hard Times Ahead

IT HAS BEEN A DIFFICULT few months for Facebook, Inc. (Nasdaq: FB) after a guidance miss sent the stock tumbling in late July. However, MoffettNathanson analyst Michael Nathanson says FB stock investors shouldn’t expect a rebound any time soon as the company prepares to once again appear before Congress this week.

On Tuesday, MoffettNathanson downgraded FB stock from “buy” to “neutral.” Nathanson says there are simply too many headwinds for Facebook at the moment for the stock to outperform its peers.

“The deceleration in growth coupled with continued regulatory scrutiny is a toxic brew for any stock,” Nathanson says.

He is projecting operating income growth will slow to the low teens in 2019 as margin pressures persist. Nathanson says the last time Facebook cut guidance, it bounced back and beat those lowered expectations relatively quickly. While Facebook’s new guidance may now be on the conservative side, Nathanson says the company will have to do more this time than simply clear its own low bar.

“Even if Facebook beats its own guidance, it has a higher hurdle to clear before convincing the market that business conditions are back to normal,” he says.

Facebook stock is down 11.6 percent overall in the past three months, but it still has plenty of supporters on Wall Street. GBH Insights head of technology research Daniel Ives says Facebook’s second quarter was good enough to preserve the stock’s long-term bullish outlook.

“We also believe considerable strength from the Instagram side of the house (e.g. strong advertising and user growth) has neutralized any soft spots on the core Facebook platform in our opinion,” Ives says. “That said, Facebook still has some wood to chop ahead both on the regulatory as well as user/advertiser front, which must be successfully managed going forward.”

Twitter (TWTR) CEO Jack Dorsey and Facebook chief operating officer Sheryl Sandberg are scheduled to testify before the Senate Intelligence Committee on Wednesday to discuss foreign actors using the social media platforms to attempt to influence the midterm elections. Twitter and Facebook removed hundreds of accounts in August that were determined to be tied to propaganda campaigns originating from Iran and Russia.

In addition to the “neutral” rating, MoffettNathanson has…

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