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Earnings

Will advertising issues hit Facebook’s share price?

A rocky few months have caused Facebook’s [FB] share price to stumble ahead of its upcoming Q2 earnings.

Facebook’s share price plummeted alongside the wider market in March, before recovering well in the second quarter in which it climbed 36.1%. It continued to climb in July, creeping up 8% to a high of $245.42 on 20 July.

However, Facebook’s share price has since pulled back. In the past week, the stock slid 4.9% to $233.50 on 27 July.

Will Facebook’s share price regain its composure following its Q2 earnings report on the 30 July?

 

 

Share price holding steady

In early June, staff staged a virtual walkout after CEO Mark Zuckerberg refused to follow Twitter in removing a post by US President Donald Trump’s that read “when the looting starts, the shooting starts”, in response to rising protests following the murder of George Floyd.

Instead, Zuckerberg said the post should remain public for people “to see this for themselves, because ultimately accountability for those in positions of power can only happen when their speech is scrutinized out in the open”.

Zuckerberg’s assertion did little to reassure employees, the public or advertisers.

By mid-June, advertisers began to pull ads from Facebook and Instagram as part of the ‘Stop Hate for Profit’ campaign. By 1 July, more than 400 advertisers including Microsoft [MSFT] (spent $115.9m on Facebook advertising in 2019), Adidas [ADDYY] and Reebok ($12.4m), Coca-Cola [KO] ($22.1m), CVS [CVS] ($34.5m), Dunkin’ [DNKN] ($15.6m), Hershey’s [HSY] ($36.5m), Unilever [UL] ($42.4m) and Starbucks [SBUX] ($94.9m), had committed to halting advertising on the social network.

Moves by the company to stop the exodus — including an announcement at the end of June that it would start labelling inaccurate posts from politicians and ban false claims intended to aid voter suppression — have so far proved unsuccessful. Few of the advertisers who joined the campaign have relaunched ads on the platform.

In early July, Walmart [WMT], McDonald’s [MCD], Kellogg’s [K], Kohl’s [KSS], Dell [DELL], Peloton [PTON], Ikea and more also paused advertising, although they did not explicitly announce that they were joining the campaign.

Despite the abstaining advertisers already costing the company hundreds of millions of dollars, Facebook’s share price has held steady. Rather than causing it to tank, the effect seems to have instead halted a climb in value that many of its big-tech peers have continued to experience in recent months.

Revenue losses may well have already been priced in — along with any negative effects of COVID-19 — with the Zacks consensus estimates for EPS standing at $1.44. While this would represent a 58% rise on the year-ago quarter, it's 18.7% lower than Q1’s $1.71. Sales for Q2 are expected to come in at $17.3bn.

$17.3billion

Facebook's expected Q2 sales

Do analysts foresee a rebound?

Despite the issues facing Facebook, neither the company nor analysts covering the share price are hitting the panic button yet.

Importantly for the firm, few of those that have pulled ads are amongst the top 100 spenders on Facebook platforms according to research by CNN Business. Of the company’s 25 biggest spenders, just five have now pulled advertising.

Zuckerberg is also hopeful that those advertisers who have pulled spend will come back toward the end of the year, if not sooner. “My guess is that all these advertisers will be back on the platform soon enough,” he told employees at the beginning of July, according to The Information.

It seems to be a belief matched by analysts, with consensus estimates for Q3 currently predicting that EPS will be back at $1.70 and sales to exceed Q1 2020 at $18.92bn.

Furthermore, analysts are near-universally bullish on Facebook’s share price. According to CNN Money, of 47 analysts polled, 36 rate the stock a buy, 3 rate it as outperform and 6 rate it as a hold. Just 2 rate the stock a sell.

 

Market Cap$665.581bn
PE ratio (TTM)32.01
EPS (TTM)7.29
Quarterly Revenue Growth (YoY)17.6%

Facebook share price vitals, Yahoo Finance, 30 July 2020

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