Pivotal Research Notes Facebook's Solid Q3 Was Overshadowed By Guidance, Lowers Price Target

Facebook Inc (NASDAQ: FB) reported a solid third quarter report on Tuesday but cautious guidance during the post-earnings conference call resulted in what Brian Wieser of Pivotal Research Group described as "another October surprise."

Wieser recalls Facebook's third quarter conference call a year ago when the company's former Chief Financial Officer David Ebersman said that a drop in usage among teens has caused some immediate concern.

This time around, Ebersman's successor Dave Wehner introduced expectations for revenue growth in the fourth quarter, along with expense growth for the remainder of 2014 heading; 2015 expenses were roughly $1 billion more than some analysts had expected.

"Expenditures of this scale were clearly unexpected as the stock dropped off by more than 10 percent subsequent to comments," Wieser wrote. The analyst adds that the extent of Facebook's spending is "merely accelerated and not a sign of sustained growth at comparable levels" which will have a "limited" impact on the stock's valuation.

Wieser has faith in Facebook's management team given a history of financial discipline. As such, the company's higher spend guidance should "warrant only a modest reset."

"We look at the news as we did with the actual acquisition of WhatsApp, which similarly necessitated a reset in the stock's valuation to account for dilution," the analyst believes.

Bottom line, Facebook's strong ad tech proposition could yield faster growth in advertising revenue while WhatsApp could see a doubling of its revenue base if managed properly, according to Wieser. Despite the company's solid pipeline, the analyst speculates that investors may need to see "positive newsflow" to get excited over the name again.

Shares were maintained as Buy rated with a price target lowered to $103 from a previous $106.