If the Cambridge Analytica fiasco, one mishandled public relations incident after another and numerous earnings calls that went down as some of the biggest blunders in history wasn’t enough, now enter an international advertising boycott. Here we go again, Facebook (FB) investors have been through a lot over the past two years. Now another challenge is confronting the company via an advertising boycott that’s growing into the hundreds of multinational companies. This challenge may weigh heavier on the company since this boycott will directly impact revenue as expenses swell. The magnitude of this boycott will inevitably influence the stock price as this movement grows in numbers and duration. If Facebook can appease advertisers in a timely fashion, then this may be a temporary challenge. However, as advertising spending is abandoned indefinitely due to this boycott and overall spend slows due to COVID-19, this culmination could cast uncertainty around its stock valuation. Thus far, over 400-plus brands have fled Facebook.
Boycott Growing In Numbers and Duration
International household names such as Adidas, Best Buy (BBY), Clorox (CLX), Ford (F), HP (HPQ), Starbucks (SBUX), Coca-Cola (KO), and Verizon (VZ) have joined the advertising boycott across Facebook and its platforms. Companies are jumping on the bandwagon daily, including a significant recent addition of Microsoft (MSFT). Total advertisers that have abandoned Facebook and its Instagram properties have now ballooned to over 400 organizations. With an undefined timeframe of how long these advertisers will stay away from Facebook may dampen revenue expectations. Another complexity that may arise is the ability to appease the collective group of advertisers in order to bring all of these companies back to the platform.
Bridging the Advertiser Gap
Facebook and its top executives, including Mark Zuckerberg himself, have agreed to meet with civil rights groups who organized an advertising boycott of the platform. Facebook and the National Association for the Advancement of Colored People, the Anti-Defamation League, and Color of Change will hold a meeting with COO Sheryl Sandberg and Chief Product Officer Chris Cox. The civil rights groups said they wanted Mark Zuckerberg to be at the meeting as well. Facebook said it would submit to an audit of its hate speech controls, adding to plans to label newsworthy content that would otherwise violate its policies, following similar practices to Twitter (TWTR). We’ll see if these meetings and corrective actions will begin the healing process with the hundreds of companies that have paused advertising spend on its platforms.
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Financial Impact
Thus far, the boycott is unlikely to have a significant financial impact. The top 100 brands on Facebook in 2019 likely brought in only 6% of Facebook’s total $70 billion in annual revenue, per Pathmatics data, which measures most types of advertising on the platform. Facebook said last year its top 100 advertisers accounted for less than 20% of total ad revenue. Although this may seem insignificant, this translates into hundreds of millions and even billions potentially as this boycott escalates with reach and duration.
Facebook is now testing its all-time highs with a reasonable price-to-earnings multiple when compared to its tech cohort outside of this boycott. Facebook continues to post unparalleled growth for a company of its size, while its platforms are still the go-to properties for advertisers and influencers. If the company continues its path forward on the remediating the privacy issues while posting best-in-class revenue growth, the stock will likely continue to elevate higher. Although Facebook has been the go-to platform for advertisers, this boycott is a wake-up call, and the company must respond quickly to appease those involved in the boycott before permanent damage is done to the advertising relationships.
Conclusion
As if the privacy issues and potential regulatory headwinds from past issues weren’t enough, now Facebook is facing a mass advertising boycott of over 400 brands. Facebook had recently paid a $5 billion fine from the FTC due to being mired in privacy scandals and subsequent public relations mismanagement. Facebook is attempting to put these issues behind the company by spending billions on initiatives to combat fake news, ensure data integrity, implementing stringent guidelines on third-party data sharing, and overall transparency within its platform. As its recent quarter suggests, sharp increases in costs and expenses demonstrate that the company is serious about tackling these issues head-on and moving forward.
The advertising boycott is growing into the hundreds of multinational companies. This challenge may weigh heavier on the company since this boycott will directly impact revenue as expenses swell. The magnitude of this boycott will inevitably influence the stock price as this movement grows in numbers and duration. If Facebook (FB) can appease advertisers in a timely fashion, then this may be a temporary challenge. However, as advertising spending is abandoned indefinitely due to this boycott and overall spend slows due to COVID-19, this culmination could cast uncertainty around its stock valuation. Although Facebook has been the go-to platform for advertisers, this boycott is a wake-up call, and the company must respond quickly to appease those involved in the boycott before permanent damage is done to the advertising relationships and restore this lost revenue.
Noah Kiedrowski
INO.com Contributor
Disclosure: The author holds shares in AAL, AAPL, AMC, AMZN, AXP, DIA, GOOGL, JPM, KSS, MA, MSFT, QQQ, SPY and USO. However, he may engage in options trading in any of the underlying securities. The author has no business relationship with any companies mentioned in this article. He is not a professional financial advisor or tax professional. This article reflects his own opinions. This article is not intended to be a recommendation to buy or sell any stock or ETF mentioned. Kiedrowski is an individual investor who analyzes investment strategies and disseminates analyses. Kiedrowski encourages all investors to conduct their own research and due diligence prior to investing. Please feel free to comment and provide feedback, the author values all responses. The author is the founder of www.stockoptionsdad.com where options are a bet on where stocks won’t go, not where they will. Where high probability options trading for consistent income and risk mitigation thrives in both bull and bear markets. For more engaging, short duration options based content, visit stockoptionsdad’s YouTube channel.
