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Should Facebook investors ride out the ad boycott—or cash out?

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The past week has been a maelstrom of controversy for tech giant Facebook, as a slew of companies are announcing they will boycott advertising on the site due to concerns over how the platform deals with hate speech and violence.

At this point, over 180 companies—including behemoths like Unilever, Honda, Verizon, Patagonia, as well as smaller firms—are boycotting Facebook ads, while others like Coca-Cola and Starbucks are pausing them.

On Friday, Facebook’s stock took an 8% nosedive, with massive volume of over 76 million, according to S&P Global data (large volume in trading typically means the stock’s move is more significant). And amid the spate of negative news for the tech giant, some investors may now be wondering: is it time to sell Facebook?

The ad boycott and the top line

Advertising is Facebook’s bread and butter, and with more companies announcing they are joining the boycott, the hit to Facebook’s business is still a question mark.

Bloomberg Intelligence estimated the social media giant could take as much as a $250 million hit to revenue owing to boycotts. But losing advertising revenue from these heavy-hitters likely won’t impact Facebook’s top line as much as some investors seem to think, analysts argue.

Two things that could work in Facebook’s favor, as Fortune recently reported: the boycott may be temporary, and Facebook uses an auction process for ads, which means other (perhaps smaller) companies could plug the holes.

Indeed, the boycott “would have to get hundreds, if not thousands of advertisers to join in order for there to be any real impact,” Colin Sebastian, an analyst Baird, recently told Fortune.

However, other analysts believe the problem poses more of a threat to Facebook than merely a PR disaster. “Given the amount of noise this is drawing, this will have significant impact to Facebook’s business,” Wedbush Securities’ Bradley Gastwirth wrote in a note. He added “Facebook needs to address this issue quickly and effectively in order to stop advertising exits from potentially spiraling out of control.”

But even if a swath of companies boycott Facebook’s ads, the impact to the company’s 2020 revenues will likely be muted, Wedbush’s Michael Pachter believes. Pachter says the move is rather “toothless,” and that these companies “want to advertise there, but they also want their consumers to feel like they’re good companies that reflect their customer’s values. If [CEO Mark] Zuckerberg can align with [these companies’] customers’ values, [they’ll] be right back,” he suggests to Fortune. Indeed, Morningstar’s Ali Mogharabi writes that he expects “most of the advertisers will return to Facebook given its more than 2.6 billion users,” Mogharabi wrote on Monday.

Zuckerberg has already made a move to quell concerns over the site’s policing: on Friday, the CEO announced the company would take some measures including flagging some posts and cracking down on “a wider category of hateful content in ads,” Zuckerberg wrote in a post Friday.

But the impact of the boycott, Pachter argues, will depend on how long and deep it goes. “In a vacuum if the company does nothing, it’s devastating. But they’re not stupid, so they’re not going to do nothing,” he tells Fortune.

Doing the math, Pachter sees the hit as 10% to 20% of Facebook’s advertising revenue “times whatever you think the duration [of the boycott] is.” Worst case scenario and the boycott lasts for three months into the next quarter, he says, “it’s 25% of the year times 20% ad revenue, it’s 5% [hit to revenue]. That’s the range, that’s as bad as it gets,” he says.

Based on the current consensus, the Street sees Facebook doing about $77 billion in revenue for the year (Facebook did $70.7 billion in revenue last year). If Facebook takes a 10% hit to advertising during the boycott for a little over a month, Pachter points out, it’d be about a 1% revenue hit for the year. “So, 1% of $77 billion—it’s not enough to move the needle. We [estimate they are] growing by 10% this year, so they’d grow at 9%. Who cares,” Pachter argues.

A declining ad environment

Facebook impressed the Street in the most recent quarter, beating revenue estimates by reporting $17.74 billion—up 17% from a year ago. Ad revenue took a big hit in March as the country plunged into lockdown, but the company said things were beginning to stabilize in April.

Now consensus estimates for the 2nd quarter are around $17.1 billion, according to S&P Global data, down over 3% from the 1st quarter. Pachter sees a 10% decline in advertising and demand for 2020 en masse, as companies in certain industries like travel and even beverages (apart from alcohol) will likely be more frugal on ad spend amid the reopening (and recession), he suggests.

At Facebook’s current price, Pachter has a “buy” rating for the stock, but “I just think it’s going lower when they report [next quarter’s earnings] because I think ad spending is going down,” he says.

Still, unlike some of its high-flying tech peers, Facebook’s stock is actually not trading at a crazy multiple. The stock’s trailing price-to-earnings (P/E) ratio is around 25, and its next 12 months P/E is roughly 29, according to Bloomberg data. Facebook currently has 46 “buy” ratings, versus just 3 “sell” ratings.

The stock has run-up about 5% year to date, but the latest sell off comes a few days after Facebook’s stock reached an all-time high at $242 per share on June 23. At that level, the stock is still trading below the 12 month consensus price target of $245, per Bloomberg data.

Pachter, for one, has a price target of $250 for the stock. On a “relative basis, Facebook is cheaper than Google and Amazon and Microsoft and Netflix, so sure, yes, I would rather own Facebook than those other stocks at this price,” says Pachter. “I just think the market is going down, so it’s hard to pound the table here.”

On Monday, the stock managed to trade up over 2% to close.

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Lyron Foster is a Hawaii based African American Musician, Author, Actor, Blogger, Filmmaker, Philanthropist and Multinational Serial Tech Entrepreneur.

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