Facebook Inc. (FB) faced a very public onslaught of companies joining an advertising boycott across its social media platforms. However, its latest earnings suggest that this effort may have been largely symbolic and effectively inconsequential to the company’s revenue and growth numbers. The advertising boycott had grown to roughly a thousand groups and multinational companies. This presented a unique challenge that still has the potential to weigh heavier on the company since this boycott will directly impact revenue as overall compliance/security expenses swell. The magnitude of this boycott may inevitably influence the stock price if this movement expands in sheer numbers and duration. If Facebook can appease advertisers in a timely fashion, then this may be a temporary challenge as these companies rejoin the social media platforms. However, as advertising spending is abandoned indefinitely until further notice due to this boycott and overall spend slows due to COVID-19, this culmination could cast uncertainty around its stock valuation. Even though over 1,000-plus brands have fled its platforms, Facebook has an advertising moat. The breadth and depth of its advertising partners go far beyond this collection of ~1,000 groups and companies, which translates into only X% while the company still grew its revenue by 11% in Q2.
Q2 Earnings and 11% Revenue Growth
Facebook’s earnings for Q2 blew out expectations for both earnings and revenue with $1.80 vs. $1.39 expected and $18.7 billion vs. $17.4 billion expected, respectively. Daily active users were 1.79 billion vs. 1.70 billion expected, monthly active users came in at 2.7 billion vs. 2.6 billion expected, and average revenue per user came in at $7.05 vs. $6.76 expected.
These are blow out numbers across the board, and as expected, Facebook said that its user growth reflects increased engagement from consumers who are spending more time at home. Facebook has 3.14 billion monthly users across its platforms (Instagram, Messenger, and WhatsApp), compared to 2.99 billion in the previous quarter. The company forecast revenue growth for the third quarter of about 10%, beating analysts’ expectations for growth of 7.9% (Figure 1).
Better yet, Facebook said that through the first three weeks of July, its year-over-year revenue growth was about 10%. This forecast, while topping projections, takes into account ongoing headwinds, including economic volatility, the ad boycott, regulations around ad targeting and Apple’s upcoming iOS 14 operating system.
Figure 1 – Monthly active users of 2.7 billion on the Facebook platform while there are 3.14 billion monthly users across its platforms (Instagram, Messenger, and WhatsApp)
Boycott Revenue Impact
International household names such as Adidas, Best Buy (BBY), Clorox (CLX), Ford (F), HP (HPQ), Starbucks (SBUX), Coca-Cola (K), and Verizon (VZ) have joined the advertising boycott across Facebook and its platforms. Some companies are jumping on the bandwagon daily with a major recent addition of Microsoft (MSFT). Total advertisers that have abandoned Facebook and its Instagram properties have now ballooned to over 1,000 total members. 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 to bring all of these companies back to the platform.
Despite this, Facebook said its year-over-year ad revenue growth rate in the first three weeks of July were in-line with its second-quarter year-over-year ad revenue growth rate of 10%, and that its ad revenue growth rate for the third quarter will be “roughly similar to this July performance.”
Facebook listed an “impact from certain advertisers pausing spend on our platforms related to the current boycott” as a factor contributing to its third-quarter outlook and said macroeconomic uncertainty, a normalization in a recent surge in community engagement and potential regulation would also impact its third-quarter ad revenue.
|
This list ranks the top optionable stocks daily based on trend, volume, price and our proprietary algorithm. FREE Bonus: The Strategy Used To Make 5 Million In 2 Years! |
The boycott movement may have hurt Facebook in the public relations arena; however, it’s largely inconsequential in terms of an impact on revenue. Wedbush analysts said in a research note that they expected “minimal financial impact from brand boycotts,” given the duration of announced boycotts, the firm expected roughly $100 million of “near term brand revenue is at risk, representing less than 1% of [year-over-year] growth in Q3.”
In short, the boycotts won’t be a significant hit, and ad revenue will continue to grow despite the boycotts.
According to marketing analytics platform Pathmatics, the top U.S. 100 advertisers on the Facebook platform in July 2020 spent a combined $338.2 million, while the top U.S. 100 advertisers in July 2019 spent $389 million. However, it should be noted many marketing budgets have also been slashed amid the pandemic.
Facebook is increasingly less reliant on big spenders as its advertiser base grows. Last week, the company said its top 100 advertisers represented 16% of its $18.3 billion in total ad revenue in the second quarter, a lower percentage than a year prior. The company now says it has more than 9 million advertisers on its platform, mostly small businesses. Other companies are resuming their spend on Facebook, though many said they plan to continue to review the platform on an ongoing basis.
Moat and Growth
Facebook is now at all-time highs with a reasonable price-to-earnings multiple when compared to its tech cohort. 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 is working on common ground to appease those involved in the boycott before permanent damage is done to the advertising relationships.
Past and Path Forward
As if the privacy issues and potential regulatory headwinds from past issues weren’t enough, now Facebook is dealing with a mass advertising boycott of over 1,000 groups and companies. 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, increases in costs and expenses demonstrate that the company is serious about tackling these issues head-on and moving forward.
Conclusion
Despite this advertising boycott, Facebook Inc. (FB) said its year-over-year ad revenue growth rate in the first three weeks of July were in-line with its second-quarter year-over-year ad revenue growth rate of 10%, and that its ad revenue growth rate for the third quarter will be “roughly similar to this July performance.” The boycott movement may have hurt Facebook in the public relations arena; however, it’s largely inconsequential in terms of an impact on revenue. In short, the boycotts won’t be a significant hit, and ad revenue will continue to grow despite the boycotts.
Facebook is increasingly less dependent on large spenders as its advertiser base grows. The company said its top 100 advertisers represented 16% of its $18.3 billion in total ad revenue in the second quarter, a lower percentage than a year prior. The company now says it has more than 9 million advertisers on its platform. Other companies are resuming their spending on Facebook, though many said they plan to continue to review the platform on an ongoing basis. 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.
Noah Kiedrowski
INO.com Contributor
Disclosure: The author holds shares in AAL, AAPL, AMC, AMZN, AXP, DIA, GOOGL, JPM, KSS, MSFT, QQQ, SPY and USO. 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.
