The impact of the global pandemic on social media has been more nuanced than on other sectors. On the one hand, engagement has increased on platforms on account of the shelter in place measures. But the uptick in engagement has been offset by reduced flow from the platforms’ main revenue source – advertising. Ad budgets have been slashed amid the economic uncertainty. But if any company can withstand the impact, argues Wedbush analyst Michael Pachter, it is the king of social media Facebook (FB).
Yet, ahead of the release of Facebook’s anticipated quarterly statement next Wednesday, the analyst concedes the drop in ad spending across the board will impact Facebook, too.
Pachter lowered estimates for Q1 revenue from $18.539 billion to $17.750 billion to reflect year-over-year growth of 18%, compared to his previous call for growth of 23%. EPS also gets a reduction – from $1.98 to $1.94, along with a haircut to Q1 estimates for EBITDA, down from $8.194 billion to $8.05 billion.
Behind the lowered estimates are some alarming facts concerning the advertising industry. In Q2, digital ad spending in the U.S. is forecast to drop by 33%, according to a March study of U.S. media planners by the Interactive Advertising Bureau. Additionally, spending plans for 2H20 have yet to be formalized by approximately two thirds of the survey’s participants. This spells uncertainty. But despite assuming Facebook’s revenue growth rate for the year will be reduced by half from 22% to 11%, Pachter believes Facebook has the ammunition to weather the ad headwinds.
The analyst opined, “Facebook has consistently executed on its core business model and we expect the company to capture market share in a declining advertising spend environment, given its scale and robust suite of tools to help advertisers manage costs and maximize budget efficiency.”
To this end, Pachter reiterated an Outperform along with a $250 price target. Investors will be pocketing gains of 37%, should Pachter’s thesis play out in the coming months. (To watch Pachter’s track record, click here)
The rest of the Street maintains a bullish stance, too. Facebook’s Strong Buy consensus rating is based on 36 buys and a Hold and Sell, each. The average price target is $222.41, and implies potential upside of 22%. (See Facebook stock analysis on TipRanks)
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