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A growing advertising boycott of Facebook and its Instagram unit over the social media giant’s handling of racism, violence and misinformation on its platform has been getting much attention, and Facebook’s stock has in recent days fallen from a high, but Evercore ISI analysts Kevin Rippey and Lee Horowitz say it is “a big nothing for the fundamentals” of the company.
Starbucks, Levi’s and alcoholic drinks giant Diageo are among the latest blue-chip companies, following the likes of Unilever, to join the boycott against Facebook, led by chairman and CEO Mark Zuckerberg. “We stand against hate speech,” Starbucks said.
On June 17, a group that included the Anti-Defamation League, the NAACP, Sleeping Giants, Color of Change, Free Press and Common Sense launched the #StopHateForProfit social media campaign that called on companies to suspend advertising on Facebook and Instagram for the month of July. Facebook has faced criticism, externally and internally, in recent months for misinformation and racist comments on its platform, including posts from President Donald Trump that critics have condemned as dangerous or inciting violence.
Zuckerberg has remained firm though that Facebook will not regulate online speech. But as the ad boycott started to gain momentum, Facebook said that it would flag “newsworthy” posts from politicians and political groups that break its rules, including those from Trump, as well as ban posts that discourage voting with false claims.
The Evercore ISI team of analysts, in a rare Saturday report, analyzed the financial impact of the boycott. “The disconnect between the perception of large advertisers’ importance to Facebook revenue and these advertisers’ actual contribution remains as striking as ever,” they concluded. “While Unilever is near the very top of media buyers in the world, it represents about … $150 million of Facebook’s more than $80 billion 2020 revenue. Moreover, a pullback from brand advertisers creates opportunity for performance marketers in the form of reduced ad pricing and higher return on ad spend; this dynamic will reduce the (otherwise small) impact of the brand boycott.”
The analysts argued that “the mismatch between perception and reality with respect to the importance of big brands’ spend on Facebook” is based on “the incorrect view that the ad market is homogenous and that the makeup of Facebook’s ad revenue base is similar to that of television.”
The Evercore ISI team also argued that the novel coronavirus pandemic may really be behind the ad spending cuts. “Call us a bit cynical, but the current brand boycott seems like an opportunity for PR among advertisers already looking to reduce spend amidst a weak macro environment,” the wrote. “As such, we don’t think there will be a material reallocation of budgets to other platforms in the second half of 2020.”
To the extent that some ad reallocation does occur, the analysts suggested that “the path of least resistance for agency buyers will win out, bringing incremental dollars to YouTube or open web buys.”
What about the boycott’s impact on Facebook’s stock? It hit a 52-week high of $245.19 on June 23 before falling more than 10 percent and closing last week at $216.08, giving the social media giant a market capitalization of around $615 billion.
“For tactical investors, a move to the sidelines is a likely outcome in the immediate future,” the Evercore ISI analysts said about the outlook for Facebook shares. “For investors focused on a horizon measured in months and years rather than days and weeks, there should be little reason to reconsider their investment thesis.” The analysts have an “outperform” rating and $280 price target on the stock.
Daniel Salmon, analyst at BMO Capital Markets, in a Sunday report also commented on the ad boycott, highlighting its potential impact on big online players beyond near-term revenue. “The list of advertisers pulling Facebook spend (and increasingly, all social media, often including Twitter and YouTube) for the month of July is growing,” he noted. “With Facebook sporting 8 million-plus advertisers and many direct response advertisers willing to spend more in ad auctions when others step away, we don’t expect the revenue impact to be material at this stage. But with Facebook’s latest changes announced Friday being met with calls for more still, the issue should continue to be monitored.”
Overall, he argued that “the more important financial impact could be how the boycotts help build more pressure to increase ‘safety and security’ spending over the mid-term, versus any near-term revenue impact” and concluded that it is “becoming harder and more expensive to operate ‘open’ social media.”
Said Salmon: “We tend to favor more ‘closed’ internet businesses today,” including the search ad businesses owned by Alphabet’s Google and Amazon and streaming services like Netflix and Walt Disney’s Disney+. The analyst rates all those companies at “outperform,” while rating Twitter and Facebook at “market perform.”
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