Analyst Richard Greenfield at BTIG just cut Facebook's stock to SELL.
Greenfield thinks the "high engagement on mobile ads" metrics Facebook has been citing recently to whip up enthusiasm for its mobile opportunity are a function of accidental or deceptive clicks rather than evidence that Facebook users actually want to share Facebook ads with their friends.
Greenfield also thinks Facebook is so desperate to generate revenue growth that it is now flooding the service with ads and, in so doing, making the Facebook experience worse for users. He thinks this will ultimately drive Facebook users away from the service.
Here's Greenfield:
[W]e have grown increasingly concerned with Facebook?s mobile monetization approach. ?
We see a growing ?tension between the Facebook user experience and monetization,?particularly?as the collapse of payment revenues has left Facebook with only one major ?lever?to pull? ? advertising. ?While mobile ads?perform?significantly?better than desktop ads, the outperformance is driven by how much of the screen they occupy (more annoying) and ?fat-fingers? (accidental clicks). ?
Given the above concerns and what is now our second earnings reduction to our Facebook estimates since the IPO, we believe a SELL rating is now warranted, with a one-year price target set at $16 (based on 11x estimated 2013 EBITDA).
Greenfield cites several examples of advertising that he regards as either deceptive or annoyingly intrusive. And many Facebook users appear to agree with his "deceptive" argument.
For example, Greenfield captured this screenshot of a Walmart ad designed to gather "likes":
As Greenfield observes, Facebook users who "liked" that page might have no idea that they were actually "liking" Walmart. But the "news" that they had liked Walmart would then be blasted out to their Facebook friends, and as a fan of Walmart, they would then be spammed with future Walmart marketing messages.
Greenfield also cites another recent Facebook advertising technique ? the placement of large "offers" and other ads in users' news feeds. Greenfield believes that the apparent "engagement" with these ads is accidental, leading to user-annoyance:
While Facebook is actively promoting how much larger and visible its advertising is, we believe more and more?sponsored?stories are being driven by?inadvertent?or?unintended Likes (the ?Fat Finger? problem on mobile) or Likes that a consumer does not want used to promote to their friends. ?It is important to realize that there is no confirmation second click to Like a brand on Facebook, so?accidentally hitting something on your mobile phone while quickly scrolling through your news feed can lead to a brand promoting that you Like it to all your friends without you even realizing it. ?Look what happened with the?Pennsylvania-based hair salon that offered us and many of our friends a discounted blow-dry offer in their news feed (click herefor our 8/23 blog post).
Greenfield offers these user comments as evidence that users are feeling annoyed and deceived:
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Basically, Greenfield thinks that Facebook is so desperate to produce revenue growth for Wall Street that it is violating its commitment to put users first. And he also thinks that the increased "engagement" that Facebook cites with respect to its mobile ads is a mirage.
Could Greenfield be right?
Yes, he could.
It's impossible to know how widespread these examples of deception and frustration are, but there's no question that they could be goosing Facebook's engagement metrics at the expense of users. If this frustration became widespread, it could lead to blowback and a crackdown. And that, in turn, could lead to a quick re-evaluation of Facebook's ad effectiveness, as well as a slowdown in revenue growth.
Greenfield also cut his estimates for Facebook. He's now looking for seriously lame revenue growth of only 14% next year.
SEE ALSO: DEAR FACEBOOK EMPLOYEES: Here's What You Should Know About Your Stock Price
Source: http://www.businessinsider.com/analyst-slashes-facebook-to-sell-2012-10
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