Facebook and Game Theory (transcript)

*This is not financial advice. All content should be considered opinionated. We are not responsible for any of your gains and losses. I am neither a licensed nor registered financial expert. Please see a financial advisor before making investment decisions.

Many companies are pulling advertising money from Facebook (with some pulling advertising from all social media platforms in general) as part of a movement called "Stop Hate for Profits."

Some of the reasons why activists don't like Facebook is that they "allowed incitement to violence against protesters fighting for racial justice in America" and for supporting white nationalist groups. Voter suppression is another as Facebook has been accused of not doing anything to stop voter suppression.

As the list of brands boycotting Facebook grows, many investors are becoming worried as these boycotts are unlike anything they've seen before. But there is something to note.

According to The Verge," a majority of (Facebook's) ad revenue comes from direct-response ads from small and medium-sized businesses." This means that big brands pulling their marketing money out of Facebook won't be detrimental to the company's business. While it's known that some big businesses are pulling their marketing dollars out of Facebook's platforms, we're not sure how many small and mid-sized businesses are doing the same. There is a lot of doubt that the small and mid-sized businesses would participate in the boycott mainly because a lot of the entrepreneurs that run those businesses would rely on them as their main source of income.

Additionally, while many businesses are boycotting Facebook, many of Facebook's users aren't boycotting the company. They're still on those social media platforms creating content, interacting with their friends and family, reading opinionated posts by experts, etc. Many of those businesses that are pulling money out of those platforms will experience a plunge in sales as the company essentially stopped advertising at a place that almost everyone goes to every day.

On a side note, I will admit that many of the big companies that pulled ad revenue from Facebook are receiving more publicity than when they're spending money advertising on Facebook.

Furthermore, once companies realize that Facebook is still one of the best places to advertise, the companies that participated in the boycott will return to Facebook and do business like normal.

This situation can also be seen as another example of game theory. Companies are boycotting Facebook because they aren't doing enough to combat these social justice issues. Facebook can either chase after those companies and promise to do everything they can to combat those issues or Facebook can sit back, take their time with handling these issues because it's a complicated process when trying to combat propaganda, and wait for those corporations to come back and continue doing business with them like normal.

And with a strong balance sheet, Facebook can surely survive the boycotts if ever they're prolonged and get worse.

I will admit, before the boycotts started, I was startled to see that Facebook's stock had a PE above 30 when they reached all-time highs despite the drop in ad spending due to the pandemic. I found the stock to be too expensive and I wondered what would be the bearish catalyst on the company. Once the boycotts started, that's when I knew that I've found my bearish catalyst. To be clear, I'm more bullish than bearish on Facebook. The boycotts are a small reason why I'm bearish. The valuations are what make me bearish. If I were to buy the dip on Facebook, I'd honestly buy it when the PE ratio of it is like 18 or 20. But we all entitled to our own opinions.

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