The biggest question is whether there are lasting effects from this boycott and whether it will make a longer-term impact on Facebook’s business. With shares down another 4.5% in pre-market trading today investors are clearly expressing nervousness over the trajectory and impact of this boycott. We know Q2 will be a tough quarter with analysts expecting revenue to only grow 1.5% y/y and EPS to decline by 4.5% y/y which we believe is too rosy and this boycott will probably add to the uncertainty over Q3. But should investors be worried about Facebook?
While boycotts are serious to any business and this boycott is very visible to consumers on which companies are not standing behind the civil rights movement driving the narrative behind this boycott, they also tend to be temporary and companies can fix the root cause of the boycott. Also consumers and businesses have short memory so the longer term effects are often minimal, but they can drive a short-term change by a company or country. Based on industry reports Facebook is still providing advertisers with some of the highest return on investment on the advertising money spent in the entire online advertising industry and thus most companies would most likely come back to Facebook’s advertising ecosystem.
In our research note last week on reasonably valued technology companies Facebook was to be found on the list as the shares offer a good mix between growth expectations and valuation. The declining share price will just improve this trade-off as the free cash flow yield is likely to increase more than the longer-term growth expectations are declining improving the overall attractiveness of these two metrics.