The Ad Boycott

The elephant in the room on Facebook (FB) right now is the ongoing ad boycott. The idea is this: brands do not want to be associated with hateful content that is found on the Facebook platforms (Instagram included) and social media in general. So, until Facebook changes its policy on controversial issues and hate speech, advertisers (in theory) will not return to spending on the platform. Two points on this front:

  • Small percentage of annual revenue likely being affected
  • Not permanent

While there have been a concerning of mega brands that have paused spending, the overall negative impact on Facebook’s revenue stream will likely be minimal. Keep in mind, Facebook has over 8 million advertisers. The vast majority of advertisers are SMBs (small and medium-sized businesses) that are getting crushed by COVID-19. The real worry should be with regard to SMBs that are pulling marketing spend in general, not just Facebook. Facebook should be worried by a weaker small business environment, however, as SMBs are far more prevalent on its platform than any other platform.

The second part of this ad boycott is how long it will last. There are some individual brands that are pulling advertising pending further notice, but most anticipate a return to spending in July. So, for the minimal impact this reduced spending will have, the headwind will likely end for the most part soon.

So, why is there even a boycott in the first place? The majority of these brands that are now boycotting social media advertising (Facebook, in particular), are seeing financial struggles as a result of COVID-19 and were already looking to cut costs. Everyone knows that in a recession or a period of financial hardship for a business, one of the first expenses to be cut is marketing. So, these business were already going to cut marketing spend – why not hook themselves up to the bandwagon of a social cause and gain social brownie points? It’s cost efficient and a good PR strategy. So, really, for the brands, it is stupid not to.

What About #ExposeFacebook?

While the entire market is focused on the ongoing ad boycott, investors are missing out on another issue that is mostly flying under the radar. While I try to keep politics out of my analysis, that is hard when politics is so ingrained in the Facebook narrative.

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Essentially, a group called Project Veritas exposed Facebook content moderators for using their own personal political bias to silence those with a differing opinion. This has nothing to do with hate speech or taking down criminal activity. It’s just plain political bias. It shows that the content moderators – the same people that are supposed to crack down on hate speech – are using their power to silence opposing political views? Now, why is this important? The majority of individuals being banned are conservative-leaning, and the ones raising the alarm on Facebook’s free speech issue are conservatives. The ones raising the most alarm on Facebook’s hate speech policies are generally left-leaning. So, while Republicans and Democrats have different reasons for disliking the Facebook platform and what the company is doing, they both dislike the company.

Likely Bipartisan Support For Regulation

As I mentioned above, despite the difference in reasoning, members of both political parties have become anti-Facebook. This kind of bipartisan agreement is a rare find in Washington, and considering public disapproval of Facebook, the odds of regulation of Facebook are much greater now than in 2018, when the Cambridge Analytica scandal broke. And to be clear, the type of regulation I’m talking about isn’t a large $5 billion fine that Facebook would pay the FTC. The type of regulation I am talking about is the type of regulation that would actually address the problem. And now more so than ever, there is likely going to be bipartisan support for heavy regulation of Big Tech – Facebook, in particular. So what kind of regulation would be most likely? Some form of nationwide implementation of CCPA or GDPR (the Californian and European data privacy regulations) is the most likely outcome out of all of this. Greater regulation is not good for the business.

The Valuation Disparity

While many bulls (myself included) point out FB’s valuation as being unrealistically cheap, Facebook is 20X the size as the second largest social media advertising company. While there is good reason for Facebook to command a larger valuation than its peers, the key reason for this is its targeting strategy. I address the reasoning for Facebook’s valuation disparity more in detail here. Essentially, it’s targeting. As we see more regulation, Facebook’s ability to target users with ads will devolve, meaning the monetization proposition that has drawn in 8 million advertisers to the Facebook platform will be mostly gone. While I do believe Facebook should trade at a premium, the reasoning behind that premium is most certainly under threat for the first time.

Facebook On Its Pivot Foot

Right now, Facebook is essentially an advertising pure play on its pivot foot. The company is trying to move away from a slowing social media advertising market and towards lucrative businesses like eCommerce, cryptocurrency, gaming, and payments. Whether any of these pivots will be successful over the long term is still up in the air. Out of these four verticals, eCommerce has the greatest odds of success for Facebook, as it likely requires the least amount of back-end infrastructure to make it work. For now, however, Facebook’s future is tied to a slowing-growth, granted high-margin, internet advertising market. With regulators closing in on the company, it’s tough for me to make the bullish case for the stock at current levels. I would need to see the stock <$200 before I would reevaluate in a bullish manner.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am not a financial advisor. This is not financial advice. Please do not interpret it as financial advice. Do your own due diligence before initiating a position in any of the securities mentioned.