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Facebook's problems 'likely to worsen' in 2019 and investors are too optimistic, analyst warns

Technology giant Facebook is in for another tough year as marketers ramp up their scrutiny of the platform, according to Pivotal Research analyst Brian Wieser who has reaffirmed his "sell" rating on the company's stock.

"Facebook's problems seem likely to worsen from here (which is saying something considering the year it had in 2018)," said Brian Wieser in a note Monday, citing the unwitting sharing of consumer data, the threat of legislation and Facebook's role in spreading political messages as issues it is grappling with.

Advertisers are reviewing their relationships with Facebook, said Wieser, who is known for being downbeat on the company. "Advertising seems like the least of the company's worries, although we think that marketers are enhancing their scrutiny of the platform, which may contribute to further deceleration in revenue growth. The toxicity of the company may also deter commercial partners from choosing to work with Facebook, or otherwise make terms less attractive to Facebook."

Wieser maintained his "sell" recommendation on the stock and revised the price down to $113 from $125. According to Reuters data, 40 analysts have a "strong buy" or "buy" rating on Facebook with nine having a "hold" rating. Just three analysts have a "strong sell" or" sell" rating on the company with Pivotal being one of them.

A spokesperson for Facebook was not immediately available for comment when contacted by CNBC.

An employee walks past a Facebook logo at Facebook's new headquarters, designed by Canadian-born American architect Frank Gehry, at Rathbone Place in central London on December 4, 2017.
DANIEL LEAL-OLIVAS/AFP/Getty Images

The company had a tough 2018. In March, it was revealed that Cambridge Analytica got access to data from 87 million user profiles and later that month Facebook took out newspaper ads to apologize. In May, the company announced a major reorganization as part of CEO Mark Zuckerberg's mission to "fix" Facebook.

In October, the company had to remove hundreds of accounts that were spreading military propaganda in Myanmar, and said it would continue to take action. It also got rid of Facebook and Instagram accounts that were created by Russian trolls ahead of the November midterm elections, and said it would continue to invest in security and that the public and private sectors would need to work together to prevent election interference.

Regulation of the platform is also being mooted by legislators and this is likely to be costly, Wieser notes. "Regulatory action seems inevitable, but the shape it will take is unclear, and the follow-on ramifications across the company — from managerial changes at the top to an imposition of new working processes in order to avoid future problems — could be significant, and potentially more expensive than the company (or most of the investment community) anticipates."

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User numbers at Facebook were flat in North America and declined slightly in Europe in third-quarter information released in October, although total monthly active users worldwide went up to 2.27 billion from 2.23 billion on the previous quarter. Revenue for the quarter was slightly lower than expected at $13.73 billion, with Zuckerberg stating on an earnings call that it would better match costs and revenue over time. "We have ongoing weakness in consumer usage of the platform, although a saving grace for Facebook is that its scale is still substantially larger than anyone else other than Google," Wieser wrote.

Some investors are too optimistic about the problems Facebook faces, Wieser added. "We think some are too positive or otherwise looking past the scale of the risks the company faces in terms of higher costs and ongoing efforts by governments to constrain the company."

Concerns about an economic downturn are also a problem for digital ad companies, Wieser noted, as firms such as Google and Facebook rely on ad dollars from small businesses, which tend to cut their budgets in recessions.

Pivotal estimates that Facebook made between $5 billion and $7 billion from Chinese advertisers in 2018, and that might also be a problem this year if economic weakness continues in China.