In a stance contrary to nearly all other analysts, Citigroup downgraded both Google parent Alphabet and Facebook Inc. from buy to neutral on Monday, based on its view that “caution is in order” for companies that depend on digital advertising for significant portions of their revenue.
Although the shift to digital advertising has been accelerated by the pandemic, the platforms’ growth is likely to slow going forward, which could pose risk for stock multiples, wrote Citibank analyst Jason Bazinet.
Citigroup also reiterated its neutral ratings for Pinterest and Twitter and sell rating for Snap. The only digital-ad stock on which it has a buy rating is Roku Inc., based on the connected TV market still being “nascent,” reports Bloomberg.
Alphabet’s stock is up more than 30% year-to-date, and its shares are trading at a nearly decade high of eight times revenue, while Facebook’s stock has gained 12% this year and has a price-to-sales multiple of 9, versus a 5.2 average for Nasdaq 100 companies, according to Bloomberg’s analysis.
However, during its latest quarterly earnings, Facebook did repeat its own caution that advertising growth could slow or stall in 2021’s second half, and Alphabet noted that emergence from the pandemic in global markets could affect consumers’ online activity and advertising.
Citi is now the only firm Bloomberg tracks that doesn’t recommend buying Alphabet (versus 42 that do), while Facebook has 49 buy ratings, six holds and three negative views.
Facebook shares closed down 4.1% and Alphabet shares closed down 2.6% at end of day on Monday.