Company / Analytics

Analytics, 01 July 2020

Facebook boycotts: Should you buy, hold or sell?

Facebook stock has taken a hit in the past few days, beginning last Friday when the stock fell 8.3% and on Monday when it fell 4.2%, as major corporates announced they were boycotting or pausing adds on Facebook and its subsidiary, Instagram owing to concerns over how the platform deals with hate speech and violence.

In the spate of negative news, some investors may be nervous and wondering whether to buy, hold, or sell Facebook shares. While Facebook shares have dipped in recent days, analysts aren’t too worried about the company’s long-term prospects. We provide a brief outline of the situation and what investors should consider going forward.

The Situation

In the wake of the George Floyd protests and the Black Lives Matter Movement, there has been a coordinated protest against hate speech, which frequently thrives on social media platforms that struggle to reconcile free speech with policies against harassment or abuse.

Civil rights groups have criticized Facebook for not providing more robust fact-checking and for failing to remove political posts containing false or misleading information.

The campaign hit a turning point late last week when several high-profile advertisers, including consumer goods giant Unilever, Coca Cola, and Verizon joined the boycott. The defections continued over the weekend, like Starbucks, and Diageo joined in. Over 180 companies, big corporates as well as smaller firms have so far boycotted or paused advertising on Facebook and its wholly-owned subsidiary Instagram.

The Significance

How big of a deal is this for Facebook? Verizon was the first high profile company to pause advertising on Facebook last week. Analysts underestimated the overall impact of the move which has since seen Facebook lose over $80 billion in market capitalization, as more advertisers joined the cause.

Facebook has often been reluctant to calls to regulate its platforms, struggling to reconcile free speech and policies that prevent harassment or abuse. But recent boycotts, coming from leading advertisers on its platforms have seen it bulge, and respond with policy tweaks.

Facebook has said it will label ads that discuss voting to direct viewers to accurate information, ban a wider range of hateful language, and tag posts by political figures that violate its standards as “newsworthy” to indicate why they haven’t been taken down. On Friday, CEO Mark Zuckerberg posted to his Facebook Page that Facebook would take down any post that incites violence or suppresses voting. “Even if a politician or government official says it, if we determine that content may lead to violence or deprive people of their right to vote, we will take that content down,” Zuckerberg said.

How the stock moved?

On Friday, Facebook’s stock took an 8.3% nosedive, with a massive selloff volume of more than 76 million shares, according to S&P Global data. Building on Friday’s 8.3% slump, the stock fell as much as 4.2% on Monday, though it later pared its decline to 0.8%, according to Bloomberg. Facebook remains up more than 40% from a March low but has declined about 12% from a record close hit last week. The selloff has erased more than $80 billion from Facebook’s market capitalization.

According to Bloomberg, the lost market value likely exceeds the financial impact of the boycotts by a substantial degree. Bloomberg had earlier estimated the boycotts “could cost Facebook over $250 million” in sales. To compare, Wall Street expects Facebook will report full-year revenue of $77.1 billion, and second-quarter sales of $17.1 billion, a projection that has risen by 0.2% over the past week. The consensus for third-quarter revenue has also risen a similar amount in the last week.

The stock was trading at $227.7 at the time of writing on July 1, 2020, 04:26 GMT-4. JP Morgan analyst Doug Anmuth, maintained an overweight rating and price target of $245 on the stock, noting Facebook resilience in past advertiser crises, for instance, the controversies surrounding Cambridge Analytica.

Bottom Line

In the spate of negative news, some investors may be nervous and worried, wondering whether to buy, hold, or sell Facebook. While Facebook shares have dipped in recent days, the company’s long-term prospects remain positive. The bigger financial impact could stem from greater pressure on Facebook to invest in safety and security in the coming years, according to the BMO Capital Markets analyst Daniel Salmon.

There’s a limit to how far the Advertiser boycotts can go, as companies that drop advertising will necessarily lose exposure relative to companies that continue to buy ads on Facebook.

The boycott is less likely to do much damage to Facebook’s revenue, as it has a diversified base of more than 8 million advertisers, which means Facebook doesn’t face much customer concentration risk. COO Sheryl Sandberg noted on the last earnings call, that the advertiser base grew up to 8 million from 7 million in early 2019. Facebook also has a user base that continues to march higher every quarter without fail, with monthly active users (MAUs) on the core Facebook platform hitting a record 2.6 billion in the first quarter.

Furthermore, advertisers always come back to platforms with an active and growing user base. For instance, Procter & Gamble (P&G) is the largest advertiser in the world but represents just 0.5% of Facebook’s sales. The company had previously pulled its ads off Alphabet’s YouTube in 2017 over concerns around brand safety but resumed a year later after working with YouTube to address the issues. P&G is yet to halt advertising campaigns on social media but has signaled it is considering the move.

Most analysts believe that a pullback in ads could result in lower prices for direct-response campaigns, which would increase demand among advertisers. Facebook has been plagued by a seemingly never-ending string of crises over the past few years, including the prominent Cambridge Analytica scandal, but marketers have always “returned to the platform.” __________ Investors Europe provides the widest selection of online trading platforms than any other brokerage. With the uncertainty surrounding the global economy, you might want to consider investing in futures contracts or other financial instruments using one of our trusted wide selection of online trading platforms. Contact us today to find out about which options we can offer to you at +230 54490369 or trading@investorseurope.com.

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