Facebook: A Great "Short" Opportunity?

Lou Basenese

Tuesday, June 30, 2020

If you remember nothing else today, remember this:

Facebook (FB) doesn’t give a darn about its 2.5 billion users…

All it cares about is advertising revenue.

Harsh, I know. But on Wall Street, money talks.

Or as famed economist Milton Friedman put it, “The social responsibility of business is to increase its profits.”

The way Facebook set up its business, the only way it earns money is from advertisers.

But in the current economy, that could prove to be its fatal flaw. Here’s why…

Before Facebook, Only Google

The king of online advertising has always been Google (GOOG).

The company’s search service has become an indispensable part of our lives. In fact, its name has become part of our lexicon (“Google it”).

But it doesn’t actually make money from providing online search.

Instead, it makes money by serving up advertising.

This focus has catapulted Google’s stock from a 2004 IPO price of $85, to more than $1,500 today.

But guess what happened when the company faced its first economic recession?

Sheltered from the Storm?

Countless pundits were convinced that online advertising would be sheltered from the downturn. And by extension, they thought Google would be sheltered, too.

As one media story predicted at the time, “In most media, 2009 will bring unkind cuts, and Madison Avenue will never be the same. But Internet advertising seems to be holding up.”

But they were dead wrong!

In the second quarter of 2008, online advertising started to dip. And in 2009, it fell off a cliff.

And sure enough, the king of online advertising tanked. Take a look at its stock chart:

And as I’m about to explain, Facebook is set up for a similar fall.

Doomed from the Start

Long ago, Facebook COO Sheryl Sandberg confessed to Bloomberg BusinessWeek that the company sold out its users in favor of its advertisers.

As she recounted, the top brass had a big decision to make. Make users pay, or make advertisers pay.

They chose advertisers. And as a result, the company is beholden to that group. Period.

But that’s spelling big trouble right now.

You see, advertisers are bailing in droves…

Billions of Ad Dollars Are Drying Up

As The Wall Street Journal reports:

“Ford Motor Co., Clorox Co. and Denny’s Corp. are joining a parade of companies that have moved to halt advertising spending on Facebook Inc. because of how the social-media giant has handled speech on its platforms.”

This parade also includes the likes of Unilever, Microsoft, Adidas, and Coca-Cola. (You can see a comprehensive list here.)

We’re talking about hundreds of millions of dollars, and potentially billions of dollars, of Facebook’s ad dollars drying up overnight.

This time, the direct cause isn’t a recession. Instead, it’s related to social and political issues. But for Facebook, the impact could be even worse.

Against this backdrop, what do you think will happen to Facebook’s stock?

Facebook Shares Already Cracking

Well, remember what happened to ad giant Google during the last recession and you have your answer.

In fact, shares are Facebook are cracking already. They dropped more than 10% in recent trading.

If its shares eventually fall as much as Google’s shares fell during the last recession, Facebook’s stock will trade down to about $85 per share.

That’s where it traded back in 2015.

This might seem like a bold forecast…

But if the advertising boycott continues to grow, and the economic slowdown persists longer than anticipated, look out below…

Facebook could be the greatest “short” trade ever.

If you agree, consider looking at some long-dated put options.

Don’t miss out!

Ahead of the tape,