Indigo analyst N. Landell-Mills is impressed with the latest results from Facebook Inc (NASDAQ FB) and Google Inc (NASDAQ GOOG), as each have managed to keep revenue growth high in competitive market segments, but that doesn’t mean he thinks that either company is an attractive investment. He expects the combination of slowing growth and the end of QE to cause double digit percentage point drops in both companies’ stock price over the next year.
Indigo analyst N. Landell-Mills argues that some stocks have simply become too expensive in the era of QE, and that a market correction will soon cut them down to size. “We believe that the equity markets are significantly overvalued, due to low interest rates and QE (money printing),” writes Landell-Mills. “We expect a significant market correction.”
With 22% organic revenue growth last quarter and stable margins, Landell-Mills praises Google Inc (NASDAQ GOOG)’s ‘strong execution,’ but warns that its dominant position actually limits its upside. Its online search market share has been stable in the US for the last couple of years, with Microsoft Corporation (NASDAQ MSFT) Bing gaining at Yahoo! Inc. (NASDAQ YHOO)’s expense since roughly 2010.
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Despite this, Landell-Mills sees pressure on margins coming from both directions as Facebook Inc (NASDAQ FB), Microsoft Corporation’s (NASDAQ MSFT) Bing, Twitter Inc (NYSE TWTR) and others take larger portions of digital ad revenue (including both online and mobile), while Google Inc (NASDAQ GOOG) has been increasing its headcount and capex to maintain its world class data centers. Landell-Mills sets a $420 price target as his base case, representing a 29% drop from Google’s current $589 stock price.
Landell-Mills analysis of Facebook Inc (NASDAQ FB) follows a similar track, but with a much larger downside forecast. Even though Facebook had 61% revenue growth last quarter, this is down from the previous quarter’s recent peak. This might be a lot of emphasis to place on a single quarter’s results, but it could also be a sign that Facebook’s mobile ad growth is slowing down while its desktop ad revenue has been pretty stable for the last few years.
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Landell-Mills is also concerned because the ad revenue growth was driven by 19% more daily active users (DAU) and 40% higher average revenue per user (ARPU), and he thinks Facebook will face the same competitive pressures as Google. He sets a $45 price target for Facebook, 40% below the current $75.
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