Facebook Facebook couldn?t have done much better in its second-quarter earnings reported this week. Thanks to exploding mobile-ad sales, the social network?s profits and revenues blew away Wall Street estimates, leading to a 30% share jump Thursday.
Now comes the hangover: stock downgrades. At least two Wall Street firms backed off from their buy recommendations today.
The reasons, however, have little to do with Facebook?s underlying business and everything to do with valuation. At about $34, Facebook shares not only are approaching many analysts? price targets of $37 but also the $38 a share at which it went public in May 2012. As S&P Capital IQ analyst Scott Kessler put it in a note to clients today in which he downgraded his rating from buy to hold:
We are downgrading FB following significant recent appreciation, and as the stock is approaching our 12-month target price of $37. From a recent low set?June 5?through yesterday, shares rose 50%, notably outperforming the gain in the S&P 500 of 13% and the appreciation of the average Internet stock within our coverage universe of 5%. We note that despite Q2 revenues and EPS that considerably exceeded our forecasts, FB trades at a ?13 P/E of 70X and a ?14 P/E of 53X, based on our forecasts. Essentially, we think a lot of favorable news and expectations are priced into the stock.
Argus Research?joined the party, also downgrading shares to a hold. Wrote Argus analyst Joseph Bonner:
We prefer to exercise discipline by downgrading the shares rather than jumping on the momentum bandwagon. Our rating change is also based on management?s clearly delivered color on the second-quarter call. We think that Facebook is just beginning to reap the returns on its investments in mobile and new and targeted advertising products. Nevertheless, we expect its results to be highly variable in the coming quarters.
So far, those two firms are the only ones I?ve seen making downgrades. Other analysts, who raised their target prices after the quarter?s results, see some room for the shares to run. ?The stock should rightfully see continued follow-through in the coming quarter, given Street revenue estimates should be revised higher for 2014 and 2015,? wrote Anthony DiClemente of Barclays Barclays Research.
The downgrades, or simply profit-taking, may explain why Facebook?s shares fell about 1% today, to $34.01, on a day when the overall market moved just barely into positive territory.
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