An analyst at a small research firm is reiterating his negative call on Facebook shares alleging the company may be overstating its ad reach for certain age demographics in the U.S. and other countries.

Pivotal Research reaffirmed its sell rating on the social media giant, also predicting its profitability will decline as it transitions to more video content advertising.

Facebook shares declined 0.4 percent midmorning Wednesday after the report.



"Facebook is establishing itself as a destination for premium video content, and demonstrating a willingness to pay significant amounts of money for that content. Facebook can likely drive revenue growth to offset content costs, albeit at lower margins than what the company currently generates," analyst Brian Wieser wrote in a note to clients Wednesday.

"However, because of measurement issues the company has faced in the past (and possibly a new one identified by a trade publication in Australia and replicated by us within the United States), we think the primary winner of Facebook's expansion in video will be third party measurement firms," he added.



Facebook has been one of the best-performing large-cap stocks in the market. Its shares rallied 48.4 percent year to date through Tuesday versus the S&P 500's 9.8 percent return.



"Measurement issues at Facebook have been top-of-mind for many of those same marketers over the past year given revelations around over-stated average video viewing time, video viewing completions, miscalculations of organic page reach and other data which impacts how budgets are planned," he wrote.

Facebook apologized for overstating video viewership times in September of last year. The company said a metric for average user time spent on videos was artificially inflated.



Wieser cited Australian trade publication AdNews, which revealed last week "Facebook's claims to reach 1.7mm more 16-39 year-olds in Australia than exist in the country according to its census bureau."



The analyst also potentially found a similar issue in the U.S.:

"Specifically, through Facebook's Ads Manager we can see that Facebook claims a potential reach within the US of 41mm 18-24 year-olds, 60mm 25-34 year-olds and 61mm 35-49 year-olds. By contrast, US Census data indicates that last year there are a total of 31mm 18-24 year-olds, 45mm 25-34 year-olds and 61mm 35-49 year-olds."

As a result, Wieser reaffirmed his year-end $140 price target for the company, representing 18 percent downside from Tuesday's close.



"Conversations with agency executives on this topic indicate to us that the gap between Facebook and Census figures is not widely known," he wrote.



Wieser reduced his rating on Facebook shares to a hold from buy on Feb. 1. Facebook's stock has rallied 28.1 percent since his earlier downgrade.



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