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Facebook Faces More Ad Boycotts, But This Analyst Expects Minimal Impact

support@smarteranalyst.com (Ben Mahaney)

Facebook (FB) is once again mired in controversy. An increasingly large number of companies are joining a Facebook advertising boycott, in reaction to the social media giant’s tepid response to the spread of misinformation and hate speech on its platform.

The “Stop Hate For Profit” campaign has been gaining traction and among the high-profile brands to halt advertising spend on the platform are household names such as Unilever, Coca-Cola, Starbucks, Verizon, and Microsoft.

CEO Mark Zuckerberg’s defense until now has been to claim the preservation of neutrality and free speech, but that line of action is one that no longer satisfies a growing number of marketers. However, in a statement on Friday, Zuckerberg promised to ban hateful speech in ads and attach labels to politicians’ controversial posts, which will let users know they are violating the company’s policies.

Facebook has weathered many controversies in the past, but it remains to be seen how the latest outcry will affect its core business, as almost all of Facebook’s revenue is derived from advertising.

This is the issue on MKM Partners’ Rohit Kulkarni’s mind. The 5-star analyst pondered the implications of a boycott, and explained the reasons why he believes the “near-term revenue risk” is less than 5%.

Kulkarni said, “(1) FB makes the majority of its revenues from Mobile DR and SMBs. FB has more than 160 million registered businesses globally and 8 million paying advertisers; (2) Adage 100 advertisers spend less on a proportionate basis on FB. Procter & Gamble is the largest advertiser in the world, but we think it accounts for less than 0.50% of FB’s revenues; and (3) Amidst COVID-19 weakness, we think leading advertisers were planning to cut ad spend in 2H ’20, implying a lower marginal headwind to FB.”

With the Street calling for 1% year-over-year growth in 2Q and a 7% year-over-year increase in the third quarter, Kulkarni argues the “estimates are reasonable and there is upside potential given ad market recovery.”

To this end, Kulkarni reiterated a Buy recommendation on FB shares. Yet, his $240 price target implies a very modest upside. (To watch Kulkarni’s track record, click here)

Will Facebook be able to push away another reputation-damaging scandal? The Street appears to think so. Among the analysts posting a Facebook review over the past three months, 3 say Hold, while the rest – all 29 of them – say Buy. Therefore, a Strong Buy consensus rating is accompanied by a $248.21 average price target, suggesting there could be upside of 5% from current levels. But is it really worth it? (See Facebook stock analysis on TipRanks)

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