Social media stocks under pressure as Citi downgrades Facebook and Alphabet ratings
Citing growing concern that investors are overly optimistic about the prospects for online advertising, Citi analyst Jason Bazinet cut his ratings on Facebook and Alphabet to Neutral from Buy, while lowering his target prices for
Bazinet said that over the past two quarters, growth in internet advertising has been robust, given the improving economy and increasing web traffic for retailers. Still, three things make him nervous about the industry.
First, he noted that sell-side analysts expect twice as much annual growth from 2021 to 2025 for the top 10 internet ad sellers the group experienced from 2018 to 2020. “The sell side took the strength of Q4 2020 and Q1 2021 and extrapolated it over the next five years, ”he wrote. “Indeed, sellers expect annual growth of $ 75 billion per year through 2025, compared to $ 40 billion in annual growth from 2018 to 2020.”
Second, he said that while many investors believe that “advertising intensity per dollar of economic activity is increasing” – that advertisers are increasing their advertising budgets per transaction – there is little evidence of this. Bazinet said that over the past six years, U.S. ad spend on all media has remained stable at around 1.6% of personal consumption spending.
“We see little evidence of ‘below the line’ ad spend moving to advertising,” he writes.
Finally, he warned that growth is likely to slow after the second quarter as comparisons with the previous year’s figures would be more difficult. “Historically, it’s not generally optimistic for multiples,” he wrote.
Bazinet said he no longer recommends any ad-supported large-cap internet stocks other than video streaming company Roku (ticker: ROKU).
(AMZN) remains its preferred internet stock, given its growth in business-to-business services other than ads – areas such as Amazon Web Services, fulfillment, commissions and logistics.
Bazinet maintained its objectives for
(FB) and Stock Alphabet (GOOGL) at $ 320 and $ 2,415, respectively. He reduced his target for Pinterest (PINS) to $ 65 from $ 85, while he reduced his call for Twitter (TWTR) to $ 58 from $ 80. The analyst rates both stocks as Neutral.
For Snap, which Bazinet rates at Sell, it reduced its target price to $ 42, from $ 47.
At the start of Monday’s trading, Facebook was down 2.8% to $ 310.17; Alphabet had fallen 1.9% to $ 2,308.50; Twitter was down 2.7% to $ 52.35; Pinterest slipped 3.7% to $ 57.67; and Snap was down 4% to $ 52.50.
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