Google Inc (NASDAQ:GOOG), (NASDAQ:GOOGL) and Twitter Inc (NYSE:TWTR) were two of the firms hit hardest in a report from Pivotal Research published on Monday morning. Analyst Brian Wieser said that firms like Google and Twitter will have a harder time growing in the year ahead because of changes across the market.
Wieser downgraded Google from Buy to Hold, and put a price target of $570 on the firm, down from $640. He lowered his price target on Twitter Inc from $50 to $41, and also hit Facebook Inc (NASDAQ:FB) and Yahoo Inc. (NASDAQ:YHOO), noting real structural challenges in the social world.
Looking at problems for Google and Twitter
Mr. Wieser says that his downgrade of those firms is justified by big changes he sees ahead in the market as a whole, and a competition weakness in tech more generally. He says that “the dominant factor impacting changes to YE2015 valuations across our coverage universe is the higher cost of capital incorporated into equity market valuations.”
He asserts that his “view on the fundamentals of these companies aren’t meaningfully altered,” but the world in which they are set to operate in over the next twelve months will be. The big problem in the social media world, apart from the changing cost of capital, is competition, and that’s going to impact everything those firms do from now on.
The valuation changes hit Twitter the hardest as a “disproportionate share of current period value is dependent on discounted value of future cashflows.”
Pivotal lowered its price target of Facebook from $107 to $105 and Yahoo! from $49 to $42. Yahoo was hit hard by the current problems with its spin off of the Alibaba Group Holding Ltd (NYSE:BABA) shares it remains in control of.
Competition hits the tech world
Most of the big tech firms now compete with each other, a “high degree of rivalry given an absence of barriers preventing new competition,” says Wieser. He reckons that competing is going to mean “high and increasing capital needs to remain competitive.” That’s going to slow growth going forward as pressure is put on margins.
It’s not just competition between businesses that’s going to put pressure on margins, however. Mr. Wieser points to competition for other assets as a reason for his lower outlook in the longer run.
“Government regulations and consumer pushback related to management of consumer data and respect for privacy,” will also hit those in the social world hard according to Mr. Wieser.
Pivotal still says that clients should Buy shares in Twitter, and should Hold those in Google based on the new outlook for the industry as a whole. Shareholders shouldn’t expect the same kind of rise in profit, or share price, that they’ve seen in past years according to Mr. Wieser.
Stock markets are going to get tighter as interest rates rise and competition between firms in the tech industry, and other interest groups trying to gain control of the same assets, is going to put pressure on margins going ahead.