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Facebook Getting What It Deserves

Written by Briton Ryle
Posted June 29, 2020

Oh man, I am LOVING the comeuppance that Facebook CEO Mark Zuckerberg is getting right now. I expect some of you Wealth Daily readers own the stock. I am saddened that good people might be losing money on it, but I'll tell you: This is 100% the arrogant Zuckerberg's fault...

He has steadfastly declined to establish any kind of "truth in advertising" standards on the platform. Last I heard, he was refusing to fact-check political ads. Like politicians don't lie enough as it is. 

Now, I don't have any idea how Facebook is supposed to manage 2.6 billion people's accounts plus 80 million advertisers. I mean, it already employs 15,000 content moderators (which is apparently a terrible job). But when you're taking in $77 billion in revenue this year, and maybe $95 billion next year, I bet you figure something out. 

And frankly, I can see why Zuckerberg chose to go agnostic on content. Any rules about what you can say and what you can't are bound to be somewhat arbitrary. And you can bet that no matter what Facebook does, some people will still be ticked off. The irony is it seems to me that Facebook and Twitter really benefit from users being ticked off. And the more platforms we have to tell everyone how ticked off we are, the more ticked off we get. It's a weird thing, and it's why I bailed on Facebook three years ago. 

Still, the real reason Zuckerberg chose to go hands off is money. The more Facebook gives its advertisers, the more money it makes — even if that means there's some pretty shady stuff going on...

5% — Doesn't Seem So Bad

In any event, some companies — Levi's, Diageo, Starbucks, Coca-Cola, Unilever, and Procter & Gamble — have all decided they don't like the "anything goes" Wild West atmosphere at Facebook, and they are pulling their ad dollars for the rest of this year. Ouch. 

Are these companies kowtowing to their customers, afraid they might lose some business if they keep advertising on Facebook? You're damn right they are. That's how consumerism is supposed to work. Money talks. And the best companies know who their customers are and make serving them a priority. 

I've had Facebook on my "do not invest" list for some time. It's been my experience that founders who run their companies don't always act in the best interests of the shareholders. I mean, Steve Jobs got fired from Apple because he was screwing up. Aubrey McClendon ruined Chesapeake Energy. And can you imagine if you had invested with Eddie Lampert while he threw good money after bad into Sears? 

Plus, I believe that Facebook is probably at peak user value when it comes to ad rates. Yeah, it's making money hand over fist because the ability to target ads like you can on Facebook is truly a game changer. But social media in general is only 10 years old. There's bound to be some levelling.

And that process has probably just begun...

Now, you probably don't need to run out and bail on the stock. It's already gotten whacked, with $30 off those recent $245 highs. That's 12%. 

And this boycott (I guess that's what we should call it?) is only expected to knock revenue down by about 5%. Yes, it will hit earnings harder. But the thing is Facebook's not crazy expensive. The forward P/E is just over 30 — right about where Microsoft's is. So most of the impact of this boycott is already priced in.

That's not to say it won't go lower...

Buy At $200

Facebook's 200-day moving average is down around $200. I bet we get a chance to buy it there sometime in the next couple of months. I mean, I won't be buying it. But $200 looks like a decent opportunity. 

Still, you should know that this boycott does change Facebook's growth dynamics. Zuckerberg has already pledged to make some changes. And even though the changes he's suggested are pretty superficial, they will still cost money to implement. So you can lower earnings expectations a few more pennies...

But the big question I have is: What if these boycott companies find out that they don't really skip a beat at all? What if they discover that there are viable alternatives to advertising on Facebook? 

That would almost certainly mean lower ad rates. And I can tell you: Facebook stock is NOT priced for lower ad rates.

The companies that are boycotting will be back advertising on Facebook again. Those ad rates will be the thing to watch. 

Oh, and you might watch Pinterest (NYSE: PINS), too. At least some of the ad dollars pulled from Facebook will find a home at Pinterest. And if PINS can deliver, we could be re-rating the stock in a couple months.

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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