Facebook shares fall after downgrade on 'toxic brew' of slowing sales growth and regulation risk

  • MoffettNathanson lowers its rating to neutral from buy for Facebook shares, predicting the internet company will generate earnings below expectations this year.
  • "The deceleration in growth, coupled with continued regulatory scrutiny, is a toxic brew for any stock," the firm's analyst says.
Mark Zuckerberg testifies before the House Energy and Commerce Committee in the Rayburn House Office Building on Capitol Hill April 11, 2018.
Chip Somodevilla | Getty Images
Mark Zuckerberg testifies before the House Energy and Commerce Committee in the Rayburn House Office Building on Capitol Hill April 11, 2018.

Facebook shares will disappoint as governments increasingly scrutinize the company's practices, according to MoffettNathanson.

The firm lowered its rating to neutral from buy for Facebook shares, predicting the internet company will generate earnings below expectations this year.

"We believe that revenue growth deceleration coupled with the company's long-term margin guidance does not provide a meaningful near-term path for outperformance," analyst Michael Nathanson said in a note to clients Tuesday. "Facebook is increasingly under the eye of global politicians and regulators, which will force the company to become more aggressive on spending to show contrition. ... The deceleration in growth, coupled with continued regulatory scrutiny, is a toxic brew for any stock."

Facebook shares closed down 2.6 percent Tuesday.

Nathanson lowered his price target for Facebook shares to $175 from $200. The stock closed at $175.73 on Friday.

The analyst noted that the company gave lower operating profit margin guidance on its second-quarter earnings call. Facebook said the margin will fall to the "mid-30s on a percentage basis" over a multiyear period due to increased security and content review expenses. It reported a second-quarter operating margin of 44 percent.

"We do not see outsized performance on the horizon as Facebook's core platform is maturing and monetizing Stories may not be the runaway success needed in the near-term to pick up the slack," he said. "Further, expenses are expected to stay elevated as Facebook plays catch-up to secure and refresh its platform."

As a result, he reduced his Facebook 2019 earnings per share estimate to $7.90 from $8.25 versus the Wall Street consensus of $8.22.

Nathanson and the other co-founder of his firm, Craig Moffett, are widely watched analysts in the media and telecom space.

Facebook did not immediately respond to a request for comment.

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