After a quick dip on the boycott news, shares hover just under all-time highs. A slight push higher could set this name up for another breakout.
We already know Facebook dominates the social media space, with its legacy platform — Facebook — and with Instagram. Investors also know about the company’s stellar balance sheet.
Overall, its financials are able to bail Facebook out. It has fat margins and huge cash flows, while its powerful balance sheet buys the company certainty amid uncertain times. But there is still risk.
Boycotts Present a Problem for FB Stock
Businesses pulled in the reigns on spending, hacking down marketing budgets and hitting pause until there was more clarity. Many will admit it was a tough period filled with question marks. To a large extent, the current environment still isn’t a cake walk.
However, when we heard from both management teams at Alphabet and Facebook, there was encouragement. While they remained cautious, they believed that ad spending had hit a trough, as spending started to come back to the platforms. Assuming that remains the case — because the economy is moving forward and reopening has been underway for a while now — then the ad dollars should still be flowing back to these mega platforms.
Many saw this coming and it was well telegraphed by the companies. What many didn’t see coming was the boycotts.
When one’s customers start boycotting one’s platform due to the social climate of the country, that’s not good. A business does not want a protest of its own products.
While CEO Mark Zuckerberg expects the advertisers back “soon enough,” I’m not so sure. Recent channel checks suggest the boycott could last through the election, not just through the month of July.
The company’s recent civil rights audit isn’t helping matters, either.
In all, the boycott totals almost 1,000 advertisers and includes big names like Honda (NYSE:HMC), Verizon (NYSE:VZ), Sony (NYSE:SNE), Microsoft (NASDAQ:MSFT), Starbucks (NASDAQ:SBUX) and others. Some, like Coca-Cola (NYSE:KO), are hitting pause across the board when it comes to social media.
Picking Up the Pieces
Will the boycotts ruin Facebook? Of course not. The company has an iron grip on the digital ad world and on the social media platforms. Given the economic climate, it may even be in the boycotting companies’ best interests to pare back on marketing expenses in the first place.
That said, after suffering a big drop at the end of Q1 and beginning of Q2 due to the coronavirus, absorbing another impact to revenue due to a boycott isn’t good news in the short term.
It may at least have investors thinking twice before buying FB stock up at all-time highs. It could, however, give investors a nice buying opportunity down the road.
Keep in mind the company is still forecast to grow sales almost 10% this year, along with 12.5% earnings growth. In 2021, those estimates are forecast to accelerate, up to 25% and 34%, respectively.
As of the most recent quarter, Facebook has no long-term debt and just over $60 billion in cash and short-term investors. However, the latter will take a small hit, as it invests more than $5 billion in Reliance Jio Platforms and agreed to a $5 billion settlement with the Federal Trade Commission.
In other words, despite the ad-spending slowdown and the boycott, Facebook still holds an enviable financial position and is still expected to grow sales and profit this year.
Bottom Line on Facebook
As always, I continue to like Facebook for its presence on the web and in our daily lives. However, there is risk with rising coronavirus cases in the U.S. and as corporations boycott the company.
Should we get a dip, investors may look for a drop toward $200 and the 200-day moving average as a buying opportunity. Above the current all-time high at $247.65 and FB stock may run to the 138.2% extension, up near $257.50.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.