Facebook (FB) is no stranger to controversy. In 2019 alone it faced congressional hearings regarding data breaches, concerns over users’ privacy, regulatory issues concerning its proposed digital currency Libra, and a public outcry for allowing false claims in political ads. It managed to swat all these concerns away and only recently FB stock marched to a new all-time high.
But the movement to boycott ad spend on Facebook has intensified on account of an inadequate response to the use of hateful and misleading information on its platform. With more companies onboarding by the day, has the time of reckoning finally come for the all-conquering Like Generator? In a recent note to clients, Monness analyst Brian White ponders the boycott’s implications.
The 5-star analyst noted, “How long these boycotts last and the number of other companies that will join this movement are unknown. Facebook is a lightning rod for this issue… In our view, the longer this economic downturn lasts, the longer it will take for advertisers to return to Facebook… For the foreseeable future, we anticipate Facebook will struggle with weak digital ad spending trends and remain vulnerable to a deluge of negative media headlines.”
The pullback in ad spend has been a theme since the viral outbreak. Budgets were significantly slashed during the pandemic’s first wave in March. As COVID-19 cases continue to rise, the possibility of a further contraction to the economy amidst a partial shutdown could result in more ad spend reductions.
The combination of both COVID-19 and the boycott’s impact have led White to cut estimates for Facebook in 2020. White now expects revenue of $72.43 billion (down from $75.13 billion) and forecasts EPS of $6.03 instead of the previous $6.80.
However, in the long run, the 5-star analyst remains confident in the Facebook story. “Despite these setbacks,” concluded White, “We believe more people will become entrenched in the Facebook platform and society at large will shift toward more virtual interaction, including consumers, businesses and other organizations.” (To watch White’s track record, click here)
Overall, the rest of the Street still backs Facebook. 32 analysts have posted a review over the past 3 months, of which 3 say Hold, while all the rest recommend to Buy. However, the $249.23 average price target implies a modest upside in the shape of 3.5%. (See Facebook stock analysis on TipRanks)
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Out on Wall Street, sentiment can shift at the drop of a hat. Facebook’s (FB) closing price on June 23 was 242.24 per share, representing an all-time high. While less than two weeks have passed, sentiment has soured considerably in the meantime.
The “Stop Hate For Profit” campaign calls for a boycott on ad spend on the platform, due to Zuckerberg's limp reaction to hate speech and other harmful content. A growing list of companies have joined the fray (currently over 400), and the question to ask now is how much damage will the boycott have, on not only the company’s balance sheet, but also on a less tangible asset – its brand.
“Brands embed a brand promise and imply consumer trust. FB and Instagram's brands are under attack by brand advertisers, who are the subset of revenue that value brands most,” said Needham analyst Laura Martin.
The 5-star analyst believes the damage to Facebook’s brand could wipe off a big chunk of its EV (enterprise value). This is based on a Forbes calculation that Facebook’s brand value (including Instagram and WhatsApp) totaled $90 million at the end of 2019.
“By implication,” Martin said, “The valuation at risk by FB's falling brand value represents about 15% of its total EV today.”
The problem is further compounded by COVID-19’s devastating impact on SMBs (small medium businesses), which make up the bulk of Facebook’s 7 million active advertisers. Martin estimates many will not be able to withstand the pandemic’s ruinous effect, and might never open again. Even among those that do manage to make it through COVID-19, many are likely to slash ad budgets. Facebook’s reliance on well-known brands advertising on the platform is also problematic, in Martin’s opinion.
“It's not good for shareholders that FB is irritating its brand advertisers, who are the ad spenders most likely to survive COVID-19,” the analyst warned.
As a result, Martin reduced her 2Q20 Facebook revenue estimate. The analyst now expects revenue of $16.625 billion, which reflects a 2% year-over-year drop and is 5% lower than her previous forecast.
Additionally, Martin reiterated a Hold rating on Facebook without specifying a price target. (To watch Martin’s track record, click here)
The Needham analyst is currently among the minority on Wall Street. Of the 32 analysts that have posted a review over the last three months, 4 recommend to Hold, while all 28 others say Buy. With an average price target of $249.07, the upside potential comes in at 7%. (See Facebook stock analysis on TipRanks)
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