Facebook is an online social media and networking services platform. The site was launched in 2004 by Mark Zuckerberg and fellow Harvard roommates. Since then, the company has been instrumental in the growth and development of social media as we know it today. It has over 2.4 billion active users that each spends an average of twenty minutes on the site per day. That is more than a quarter of the global population. Subsidiary companies include Instagram, WhatsApp and Oculus.
Adding to coronavirus woes, recent protests, riots, hate speech and racism made global headlines. Objectionable reactions soon found its way onto Facebook. As a result, hundreds of companies have joined a temporary boycott of Facebook and other social media companies, citing inadequate restriction of hate content and misinformation. For many companies already considering a reduction in advertising budget due to pandemic-induced financial strain, a boycott of social media admittedly does seem convenient.
Facebook has faced pressure to address behaviour on its platform on multiple occasions in the past. But the reality is that Facebook will probably never be able to completely eradicate hate and discrimination on its platform due to its scale and freedom of speech. Although past boycotts barely affected its financial health, it is obviously in Facebook’s own self-interest to ensure that its users are shielded from inflammatory content. Facebook can withstand pressure from advertisers; even those with vast budgets. It has 8 million advertisers, with the largest advertiser contributing merely half a percent to revenue. About three quarters of its advertising revenue comes from smaller companies that rely on Facebook to generate sales. It would be suicidal for them to join the boycott and creates a significant moat around Facebook’s revenue base.
Despite their past objections, advertisers keep returning to Facebook. This is because none of the controversies have slowed down Facebook’s user growth. Facebook remains one of the most prominent advertising platforms in the world. The opportunity cost for companies that stop advertising on the platform altogether relative to those that continue to advertise is just too large to risk.
The overall impact of the boycott on Facebook’s revenue is expected to be relatively minor and short-lived. The company has no debt and $23 billion in cash, which adds an additional layer of safety. If the boycott leads to improvements to the Facebook user experience, that would serve to strengthen the long-term outlook for growing engagement on the platform. The coronavirus-related acceleration in the growth of e-commerce and online entertainment should increase already robust demand for digital advertising, of which the social media giant is a big beneficiary. Facebook shares are likely to remain under pressure until a compromise with advertisers and civil rights groups is reached and currently offer an attractive buying opportunity.
Frants Preis, CFA is a portfolio manager at VEGA Asset Management based in Pretoria.