Here Are the Key Risks Facebook Shares Face Now

A recession, advertiser boycott and fraught political environment could come to a head in Facebook's earnings release next week.
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After a scandal-ridden few months, Facebook's upcoming earnings report could be one of the most closely watched in years. 

Facebook's results for the quarter ending in June will reveal the dual impact of COVID-19 and a significant advertiser boycott on its advertising-based business model. And if history is any guide, CEO Mark Zuckerberg might also use the company's conference call to lay out what the company will and will not do in the face of intense criticism of its policies. 

Facebook  (FB) - Get Report shares closed 0.81% lower on Friday at $230.71.

According to estimates, spending on social media advertising recovered throughout last quarter compared to April lows. But the impact of advertiser boycotts was visible, and particularly pronounced in July. 

“We saw paid advertising bounce back and CPC increase as businesses started to return to normal across most regions and industries,” said Yuval Ben-Itzhak CEO of Socialbakers. “We saw a dip in ad spend in early June, most notably in the US, which corresponds to #BlackoutTuesday. However, ad spend returned to normal almost immediately. There was another dip in ad spend at the end of June, which was likely related to the ad boycotts that could also affect figures in Q3 2020.”

Socialbakers estimates that in North America -- which accounts for roughly 45% of Facebook's overall revenue, according to FactSet -- advertising spend on Facebook plunged by 32% in the last two weeks of Q2. During those weeks, an advertiser boycott of Facebook snowballed to hundreds of brands, including both major global advertisers and some small businesses. 

The advertiser boycott could further degrade Facebook's revenue in an already challenging quarter -- and a quarter in which investors are already flying blind on the impact of COVID-19. Like many other companies, Facebook didn't provide revenue guidance for the second quarter owing to macroeconomic uncertainty. 

Right now, consensus estimates are calling for a slight dip in Facebook's overall revenue in Q1 compared to the prior quarter, with analysts forecasting $17.3 billion in sales compared to $17.7 billion in the first quarter. Facebook shares, which haven't suffered much in the face of recent negative headlines and scandals, could come under pressure if sales results are worse than expected. 

In a recent comment, CFRA analyst John Freeman wrote that PR headaches, content liabilities, and antitrust scrutiny are "snowballing to drag down the business," lowering his rating to Hold from Buy. Freeman also cited Zuckerberg's "questionable" ability to handle certain types of threats as a potential risk factor for Facebook investors. 

Although Zuckerberg has announced some modest Facebook policy changes, such as heightened oversight of voting-related content, the Facebook CEO is staunch in his position that the social network shouldn't be an arbiter of accuracy. 

Zuckerberg has used earnings calls before to expound on this position, launching into a lengthy and full-throated defense of "free expression" on the company's third quarter earnings call last year. And he may retread Facebook's content policies again, or at least address the boycott and discuss what the company has done to prepare for its next big test: the November election.

The company has tweaked certain policies ahead of the election, announcing that it will take "extra precautions" around voter information and begin labeling posts from world leaders that would otherwise violate its community standards. But it looks increasingly plausible that many advertisers will avoid the platform altogether through the election, and maybe for longer. 

Arthur Sadoun, CEO of the major advertising group Publicis, told the Financial Times this week that he "doesn't see [the boycott] quieting down because I can see the determination . . . of our clients to make things change.” 

That squares with the outlook of some analysts regarding what the rest of the year has in store for Facebook. Earlier this month, Needham analyst Laura Martin wrote that many brands are taking the opportunity to weaken Facebook's "iron grip" on their budgets, and that ripple effects from the boycott could last into 2021, damaging both revenue and earnings. 

For the full year 2020, analysts are forecasting revenue of $77.8 billion and earnings of $7.38 per share. 

The macroeconomic environment remains a question mark for Facebook and other digital advertising firms, as well. 

EMarketer estimates that global spending on digital ads will rise by just 2% in 2020, the lowest growth rate on record. Facebook may fare better than main rival Alphabet  (GOOGL) - Get Report, according to eMarketer, but its estimate of 5.9% growth on Facebook spend still represent a significant downturn compared to 26% growth last year. 

Facebook is slated to report its next earnings on July 29 after the close of trading.