Wall Street is surprised over Facebook's lower profit margin guidance, driving at least three Wall Street firms to lower their ratings on the social media giant's shares and slash their price targets.
The company on Wednesday reported slightly lower-than-expected second-quarter sales and daily active user numbers. But the bigger disappointment was its guidance for slower sales growth for the third and fourth quarters and a dramatically reduced forecast for long-term profit margins.
Chief financial officer David Wehner said the company's operating profit margin will fall to the "mid-30s on a percentage basis" over a more than two-year period, compared with second-quarter operating margin of 44 percent.
Facebook shares plunged more than 20 percent in after-hours trading Wednesday after the guidance. The stock closed down 19 percent Thursday at $176.26.
Nomura Instinet lowered its rating to neutral from buy for Facebook shares, citing management's weak sales and profit forecasts.
"Though management is likely being overly conservative, in our view, our model has taken on an entirely new revenue growth and margin profile than what we were looking for headed into the print," analyst Mark Kelley said in a note to clients Thursday. "With stagnating core user growth, we think there is too much near- to mid-term uncertainty to recommend shares at this point."
Kelley reduced his price target for Facebook shares to $183 from $228.
In similar fashion, Raymond James lowered its rating to outperform from strong buy due to Facebook's lower profit margin guidance.
"Facebook guided mid/long-term operating margins to the mid-30s vs. our ~45% in 2018. Given the increased near-term uncertainty on revenue growth, slowing user growth, and lower margin forecast, we are downgrading our rating," analyst Aaron Kessler said in a note to client Thursday.
Kessler reduced his price target for Facebook shares to $210 from $240.
One analyst believes Facebook's other new product offerings will not be able to make up for the slowing growth rate of its core platform.
"After a pronounced selloff in response to mgmt comments about forward growth & margin trajectory, we now see the risk/reward as balanced for FB going forward," UBS analyst Eric Sheridan said in a note to clients Wednesday. "In our opinion, the new growth drivers (Instagram, Watch, Stories, Messenger/WhatsApp, VR) frankly aren't big enough over the short/medium term to alter the decelerating growth & margin pressure profile of the P&L."
Sheridan reduced his rating to neutral from buy for Facebook shares and lowered his price target to $180 from $212 for the company.
Even after the downgrades, Facebook still has a whopping 28 buy ratings on Wall Street, three hold ratings and two sells, according to TipRanks.com.
Here's a roundup of analyst comment on Facebook.