Political Ad Debate Is a Temporary Distraction for Facebook

Sometimes, strategic decisions made in the past – even with the best of intentions – can come back and haunt you. Unfortunately for Facebook (NASDAQ:FB), the social media giant is learning this lesson the hard way. As you know, the company has opened its platform for all kinds of political advertisements. But in a pivotal race, such a forum could be used to unfairly promote certain agendas. And this distraction is not helping the case for Facebook stock.

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Particularly, FB’s main rivals, Twitter (NYSE:TWTR) and Snap (NYSE:SNAP), have been much more conscientious about their politics-driven revenue streams. In Twitter’s case, it banned political ads entirely last year, following the example of TikTok. On the other hand, Snap has actively courted such advertisements. However, the key difference between it and Facebook is that Snap performs fact checks while Facebook did not.

That meant for quite a while, politicians could barrage the blogosphere with propaganda. And this has been a lingering concern for Facebook stock. According to the Pew Research Center, social media outpaced print newspapers as a news source due to demographic changes. Given that Facebook has billions of users worldwide, many believe that it has a responsibility to act ethically regarding advertisements.

Of course, the message resonates significantly due to the Cambridge Analytica fiasco, where FB may have inadvertently helped pro-Donald Trump entities secure victory in the 2016 presidential election. Since then, a cloud has hung over Facebook stock in terms of the underlying company’s social accountability (or lack thereof).

To be fair, Facebook has been more active with its advertising platform, promising to ban ads seeking to “delegitimise any lawful method or process of voting.” Will this be enough?

Facebook Stock Just Needs to Hang on for a Few Years

More so than many of its rivals, Facebook suffers from scrutiny for the content allowed on its platform. Again, the underlying network features more than 2 billion users. Given the influence that social media has on young people and Americans in general, the controversy over political ads is like ballast for Facebook stock.

Facebook stock vs. TWTR and SNAP (Year-to-Date)
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Source: Chart by Josh Enomoto

That’s not just empty talk. You can see it on the charts. In this year up to Oct. 1, Facebook stock is up 27%. However, it significantly lags its rivals, with TWTR up nearly 45%, whereas SNAP is up almost 60%. Both Facebook’s main rivals have delivered strong messages or protocols regarding materially significant content. In contrast, FB seemingly appears to allow anybody to advertise anything, so long as the price is right.

While the nearer-term picture isn’t particularly favorable to FB relative to the competition, I believe that shares will eventually recover. Interestingly, Facebook stock, TWTR, and SNAP generally trended in a similar fashion up until mid-June, when novel coronavirus cases started to rise again. It’s possible, then, that Facebook lost credibility when it allowed pro-Trump ads downplaying the pandemic to spread on its network.

But this pressure will end soon, whether by next month or in two years’ time. Should former Vice President Joe Biden win, the Trump administration will conclude, and with it, the “fake news” culture, perhaps even entities such as the alt-right. Without their guy in office, the oxygen will be sucked out of right-wing organizations.

The Trump Factor

And with that, the need to propagandize future U.S. elections will decline. Look, we can all agree that there’s no one quite like Donald Trump. The man has said things that would have politically crucified anyone else. Yet here he is, with at least a possibility of winning a second term.

With him out of the picture, Facebook loses a stubborn headwind. All will return to normal.

Plus, even if Trump wins reelection, the propaganda machine will only be incentivized to power up for the 2022 midterm elections. Under this scenario, I just can’t imagine right-wingers getting fired up for Vice President Mike Pence or anyone else who chooses to run for president on the Republican ticket for 2024.

Essentially, the problems facing Facebook stock will go away. It’s like a miracle, it will disappear.

Focus on the Fundamentals

When this chapter of American history closes, Facebook will suddenly find that what made it a target during the Trump era – tremendous influence over a huge segment of the world’s population – has instead turned into an asset.

As I’ve mentioned before, Facebook’s user demographics by age puts it at a significant advantage over other major networks. For instance, a significant number of older people, including those 65 years and up, use Facebook. On the other hand, U.S. Twitter users by age falls off a cliff when you get past the 30 to 49 demo. It’s much worse for Snapchat, which aligns heavily with youth.

This is significant because advertisers – including political ones – can reach the widest audience possible. Also, unlike Twitter, more women use Facebook than men. According to Brandwatch.com, “More than half of women use social media to show support and access deals or promotions from brands, compared to just 36% of the men online.” If you’re going to advertise, you’ll want to do so on Facebook.

Therefore, the political headwinds working against Facebook stock is a temporary distraction. Once this unusual period ends, the recovery process for FB will begin.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

Article printed from InvestorPlace Media, https://investorplace.com/2020/10/facebook-stock-political-ads-temporary-distraction/.

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