Facebook dropped Monday after a Wall Street brokerage downgraded the stock to a hold rating and warned clients that the recent departure of 11 senior managers could spark further flights from the social media giant.
Needham analyst Laura Martin wrote that Facebook’s pivot toward privacy and encrypted messaging, rising regulatory risk and the upload of disturbing content will accelerate the management exodus in what she called a “Negative Network Effect.”
“We are concerned that regulatory, headline, and strategic pivot risks will negatively impact Facebook’s valuation more than investors currently believe due to the negative flywheel created by Network Effects,” Martin wrote. “A Negative Network Effect suggests that departures will continue, and since we believe that people are a key competitive advantage of FAANG companies, this implies accelerating value destruction until senior executive turnover ends.”
Facebook has seen several of its top managers leave the company within the past several months, including Chief Product Officer Chris Cox to Instagram co-founders Kevin Systrom and Mike Krieger. Cox left last week.
Facebook also drew criticism last week after a terrorist incident in New Zealand in which a shooter live-streamed his attack on the social media site. Google’s YouTube and Twitter also struggled to track down and remove the disturbing content. The shootings claimed at least 49 lives.
It also suffered its longest service outage last week. After nearly 24 hours of intermittent access, the company said a “server configuration change that triggered a cascading series of issues” was to blame.
Martin has a $170 price target on shares of Facebook, less than 3 percent from Friday’s closing price of $165.98. Shares fell 1.2 percent in premarket trading Monday following the Needham note; the equity is down 9.7 percent over the past 12 months.
Elsewhere on Wall Street, Bank of America Merrill Lynch analyst Justin Post cut his Facebook price target to $187, down from $205.
“While we think Facebook has a significant pool of talent to operate the business, and Cox’s departure has been considered for some time given long tenure, the timing raises some concern around internal dissention on Zuckerberg’s vision for Facebook,” Post wrote. “While we continue to think estimates have been de-risked in 2019, the revenue impact of a more privacy-centric platform could raise questions on three-year growth.”