Will the Facebook Ad Boycott De-FANG Stocks?

Companies are Pausing Their Facebook Advertising Campaigns
Ford, Clorox, Adidas, Reebok, Starbucks, Coca-Cola, Levi’s, Ben & Jerry’s, Unilever, HP and more have all joined together in a boycott of Facebook, as part of the #StopHateForProfit Campaign, according to CNN’s running list of the boycott. Some of the brands will pause in July. Others won’t pick up advertising until after the election or next year.

​Advertising
Advertising makes up 98% of Facebook’s revenue. Even without the advertising boycott, the current capital crunch that many companies are experiencing puts pressure on the advertising budget. Most of the brands mentioned above are dealing with reduced budgets for advertising, as their own revenue streams have dried up or been significantly impacted by COVID-19. How many of us are buying new cars, shoes, yoga pants and a daily café latte? This could negatively impact Google’s revenue as well (known as Alphabet Inc. on Wall Street).
 
Another company that is impacted by a slash in advertising budgets is Apple. Apple was able to report a slight uptick (0.05%) in total revenue for the first three months of 2020, due to a 16.6% sales increase in Services (which includes advertising). The first quarter included only half a month of U.S. retail closures. The second quarter of 2020 will include 3 months of closure. In the first quarter of 2020, iPhone sales were down 7% year-over-year at Apple. The iPhone revenue gap is expected to widen in the 2nd quarter.

Apple sales by country in the 1st quarter of 2020.

So, the 2Q 2020 for Apple is predicted to be pretty ugly. The Work at Home and Educate at Home trends are benefitting iPad and Mac sales. However, iPhone sales make up half of Apple’s revenue, with Services accounting for 23% in the most recent quarter. Weakness in Services and iPhones impact 73% of the total revenue.

​

Apple revenue by product in the 1st quarter of 2020.

Despite withdrawing revenue guidance, Apple Inc.’s share price is back to an all-time high. The company is continuing their policy of spending about $20 billion a quarter in repurchasing their own stock and another $3.4 billion in dividends. The Apple P/E is 28. That’s expensive for a company that is facing a challenging earnings report at the end of July.
 
$25 Avocados
Facebook’s current price-earnings ratio is 33. The average P/E is closer to 16-17. Nvidia, Netflix and Amazon are all sporting intergalactic price-earnings ratios, at 71, 98 and 132, respectively. All of these companies showed revenue growth in the 1st quarter of 2020. However, given the COVID-19 Recession, these share prices are very expensive. FANG (Facebook, Apple, Amazon, Netflix, Nvidia and Google) stocks are not immune to a Wall Street rout. By March 23, 2020, each one of these FANG stocks had dropped by 35-47%, with the exception of a slightly more buoyant Amazon, which still sank 25%.

The crash was swift. The recovery has been impressive. However, can FANG remain resilient in this unprecedented recession, when all equity prices are at risk of being drug down?
 
FANG is Hot
FANG stocks are hot. They have been the brightest stars on Wall Street for years. Many benefit from being Stay at Home stocks. However, Facebook and Google both monetize their Stay at Home product with advertising dollars. Advertising dollars are typically the canary in the coal mine – the first to die when the oxygen of the bull market runs out. As was reported by the NBER, the Corona Virus Recession became official on June 8, 2020, with the high being marked as February 19, 2020.
 
The current boycott of Facebook will have a negative impact on earnings in the 3rd quarter – which doesn’t get reported until October. (The 2nd quarter ended yesterday, June 30, 2020.) So, whatever weakness that Facebook and Google report in the 2nd quarter is recession-related weakness in corporate ad spending. If the revenue downturn is severe, then investors could react more negatively to Facebook’s shares than Google, under the assumption that a bad 2Q for Facebook could be a hellish 3Q 2020. That was likely the reason Facebook’s shares dropped over 8% last Friday, when the overall market was down 2.3%.

​The Bottom Line
Having a safe, properly diversified and protected plan is your best defense against the Facebook boycott and the COVID-19 Recession. It is the AN (Amazon, Netflix and Nvidia) of FANG that will be more resilient Stay-at-Home stocks, since our Gmail and Facebook addictions are floated by advertising budgets. Having these stocks in your large cap growth slice, and perhaps even as one of your hot slices, is a good idea. Betting your future on continued strength in these very expensive and volatile assets is quite risky.
 
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