Pivotal Research analyst Brian Wieser downgraded Facebook (FB) to Sell as he thinks the market is looking at upside potential without appropriately considering risks to growth. The analyst also fears that the recent European Commission ruling on Google (GOOG; GOOGL) Shopping and its approach to dominant companies in general will pose a "greater risk" as Facebook becomes larger.
SELL FACEBOOK: In a research note to investors, Pivotal Research's Wieser downgraded Facebook to Sell from Hold, with a $140 price target. The analyst pointed out that over the course of this year, the stock has risen "dramatically," while his outlook on the stock has not given a "decent" second quarter and an outlook that appears consistent with expectations. Risks have become more pronounced, Wieser noted, but investors are not fully accounting those risks. The analyst argued that viewability remains a concern for Facebook as he thinks few advertisers are aware of low levels of viewability are on the platform. Further, with every passing year, digital advertising is closer to a point where the market is saturated, he contended. While a premium video investment strategy could help improve growth, the analyst believes it will do so with "significantly lower margins" than existing advertising products, and it will likely take significant time and investment for these efforts to become material, if they ever do. Nonetheless, Wieser continues to expect Facebook will execute well, grow its business, expand its share of wallet from most advertisers on core Facebook, Instagram and Facebook Audience Network. He also sees great long-term value in Messenger and WhatsApp, although those platforms will not likely be monetized aggressively in the near-term.
REGULATORY ISSUES: Since the beginning of the year, Pivotal Research's Wieser has seen greater uncertainty around macroeconomic and public policy issues in the U.S. and many countries around the world. Additionally, he told investors that while Facebook itself has not been impacted directly from any regulatory issues, the recent European Commission ruling on Google Shopping and its approach to dominant companies in general poses a "greater risk" as Facebook becomes larger. On June 27, the European Commission announced its decision that certain actions taken by Google regarding its display and ranking of shopping search results and ads infringed European competition law, and imposed a $2.74B fine, which the company accrued in the second quarter of 2017. Additionally, the analyst pointed out that European Commission's consumer privacy policy rules, set for implementation in May of next year, could have negative implications for both Google and Facebook due to the limitations the policy will impose on how the two companies secure rights to consumer data and subsequently use that data for ad targeting.
PRICE ACTION: In morning trading, shares of Facebook have dropped over 1% to $170.15.
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