Head of Equity Strategy
Summary: Facebook's falling share price is improving the mix between long-term growth expectations and the valuation as boycotts have historical had minimal long-term impact on businesses. In the short-term it increases the uncertainty and could cause the share price to decline further but our view is that the long-term growth of Facebook's business will not be impacted.
Facebook shares were down 8% on Friday as more companies aligned themselves with the intensifying advertising boycott which started as a response to advertisements running next to content expressing hate speech and other divisive information. Recently Twitter started labelling some of US president Trump’s tweets with fact check boxes crossing the Rubicon as social media platforms have so far held back on editorial and other censuring as they have proclaimed that they were not a media but merely providing access to people on their platforms. With Twitter’s decision questions rose to whether Facebook would follow suit, but CEO Mark Zuckerberg was hesitant leading to frustration inside the world’s biggest social media company. However, the advertising boycott of Facebook has gathered momentum and Facebook seems to have reversed stance on the subject making some changes to remove certain content.
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.
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