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Facebook faces advertising boycott, but valuations still compelling

Thiveyen Kathirrasan
Thiveyen Kathirrasan • 7 min read
Facebook faces advertising boycott, but valuations still compelling
Since January, Facebook has been facing a lot more quitters. And these quitters are companies which have announced that they no longer wish to advertise on Facebook.
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SINGAPORE (July 9): Star Wars fans will be aware that the hero of the first trilogy, Luke Skywalker — or rather the actor that plays him — quit Facebook in January this year. Mark Hamill said via Twitter: “So disappointed #MarkZuckerburg values profit more than truthfulness and I’ve decided to delete my @Facebook account.” Hamill remains on Twitter and tweets regularly. In addition, the co-founder of Apple, Steve Wozniak, has also deleted his Facebook account.

“In the absence of regulation, Facebook and other companies are left to design their own policies,” Facebook’s director of product management, Rob Leathern, wrote in response to Hamill’s tweet.

Since January, Facebook has been facing a lot more quitters. And these quitters are companies which have announced that they no longer wish to advertise on Facebook. According to US media reports, some 750 to 800 companies have announced they will stop advertising on Facebook for a month.

“Boycotts against advertising on Facebook and other social media platforms gained significant steam last week, with a growing number of the world’s largest online advertisers deciding to pause spending on social media in July as part of the #StopHateForProfit campaign started by a number of advocacy groups including the Anti-Defamation League and the NAACP [National Association for the Advancement of Colored People] on June 17,” notes Stifel Research in an update.

“The boycott campaign takes aim at Facebook’s alleged failure to prevent the incitement of violence against peaceful protestors, shortcomings in preventing voter suppression, allowing publications with histories of working with white nationalists to be trusted news sources / fact checkers, and the overall lack of protecting minorities and other specific groups of people from hateful content,” Stibel adds, referring to the backlash from the Black Lives Matter protests, following the killing of George Floyd by US police.

The dissatisfaction with Facebook goes back to the 2016 US presidential election, where Cambridge Analytica used personal information harvested from millions of Facebook users, and passed on the data to a political consultancy. Since then, Zuckerburg has said he does not intend to censor political advertisements.

Advertisers strike back

Now advertisers themselves have announced they plan to stop advertising on Facebook. In a press release on July 1, the World Federation of Advertisers (WFA) said: “A significant proportion of WFA members are reducing their spend with social media platforms as a result of concerns about policies on hate speech.”

WFA says 31% of advertisers surveyed on June 5 to 26 said they are already withholding (5%) or likely to withhold (26%) spending, while 41% remain undecided; 29% said were unlikely to (17%) or would not (12%) reduce spending on these platforms. More than half have had direct conversations with platforms about their policies on hate speech, while 48% are working through industry bodies such as the Global Alliance for Responsible Media. WFA adds that 13% of respondents are taking other actions, including making positive investments in minority-owned and focused titles, evaluating next steps internally and initiating ongoing monitoring and assessment of platforms. Some are also reviewing the role of social media platforms in the media mix.

“No brand wants to be associated with hate speech and as the effective funders of the social platform ecosystem, advertisers have a voice that needs to be heard. We are willing to work with the platforms on improvements that will benefit society, advertisers and the platforms themselves. This needs to be addressed fast because hate speech has moved from a reactive media management challenge into a boardroom issue for many companies,” says Stephan Loerke, CEO of WFA.

WFA represents companies such as Johnson & Johnson, Microsoft, Pepsico, Royal Dutch Shell, Unilever, Diageo, LVMH, Procter & Gamble and Hewlett-Packard. Between 750 and 800 companies have already paused their advertising on Facebook and Instagram. The New York Times says many of the participants are small businesses, which make up the bulk of Facebook’s eight million advertisers. But well-known brands have also said they will pause advertising on Facebook for a month. These include Adidas, Coca Cola, Chlorox, The North Face, Patagonia, Starbucks, Vans and Verizon.

In the wake of Covid-19 and the recession, advertisers would have lowered their spending anyway and the boycott of Facebook is probably a convenient avenue, market watchers say, as it provides a boost for the brands without having to pay.

According to The Washington Post, Facebook spent the last week of June in conversations with advertisers, to persuade them to come back to the platform with the promise of modest changes to address concerns on hate and outrage.

“We’ve opened ourselves up to a civil rights audit, and we have banned 250 white supremacist organisations from Facebook and Instagram,” a Facebook spokeswoman says in a statement. “We know we have more work to do, and we’ll continue to work with civil rights groups, [the Global Alliance for Responsible Media,] and other experts to develop even more tools, technology and policies to continue this fight.”

Facebook removed an advertisement by US President Donald Trump that used a Nazi-era symbol and it will also allow US users to opt out of seeing political ads. In Britain, where Facebook is alleged to continue spreading false political advertising, it will be under the purview of Ofcom, which regulates media such as the press, television and radio. Since television and radio ban political advertising, this may extend to Facebook.

Advertising revenue impacted

Facebook’s customers pay for ad products based on the number of impressions delivered, or the number of actions such as clicks, taken by the platform’s users. The revenue is recognised from the display of impression-based ads in the contracted period in which the impressions are delivered by being displayed to users, and also when the user takes action. These are monitored by algorithms.

Stifel says in hypothetical scenarios where 25% and 50% of the top 100 advertisers (of a total of about eight million) take a breather, the 3Q2020 revenue effects could exceed US$250 million ($348 million) and US$500 million, respectively. Extrapolated from 1Q2019 and 4Q2016 disclosures, the top 100 are likely to account for about 18% of Facebook’s 3Q2020 ad revenue. “Our work also shows the average revenue in 2019 at less than US$139.3 million per top-100 advertiser. The analysis assumes a global pause. If only US ads are at risk, the impact would be about half,” Stifel says.

In FY2019, Facebook announced revenue of US$70.7 billion. Of this, based on the billing addresses of its customers, US$32.2 billion was from the US and Canada, US$16.8 billion from Europe, US$15.4 billion from Asia Pacific, and US$6.2 billion from the rest of the world.

Hence in FY2019, US advertisers made up 43% of total revenue (see Table), Europe 24% and Asia Pacific 23%. The US accounts for 48% of advertising revenue and 47% of total revenue based on the geographical location of Facebook’s users when they perform a revenue-generating activity (see Chart).

According to our analysis, Facebook’s historical performance suggests tremendous growth from all fundamental fronts. Based on weighted value growth which includes revenue, net income, operating cash flow and free cash flow growth over the past five years, three years and one year, the company’s weighted value growth is much higher than its price growth, suggesting that the company is undervalued.

Yields, which reflect the attractiveness of the company based on the current price, are also strong, as they are much higher than the riskfree rate. The daily and monthly average users have also grown at an average rate of 2.9% every quarter over the past three years, which reflects the growing moat of the company through the network effect.

Based on the current outlook of the company, we value Facebook at US$243.96, which is 1.5% above its current trading price, while analysts have a price consensus of 3.1% above the current trading price. Factoring in the effects of the advertising boycott of companies, we think Facebook’s fair value is around US$212.76, which is 11.5% lower than the current price.

On the other hand, if increasing numbers of Facebook’s eight million advertisers and 2.6 billion monthly active users follow the Star Wars icon Hamill’s example, that would cause a dent in Facebook’s earnings and valuations.

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