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FB to Review Content Guidelines

Zacks Equity Research

Reportedly, a group working for gender equality, Women, Action and the Media, has started a campaign last week demanding Facebook (FB) to remove content that has hate speech and violence against women on its website. The group urged advertisers to pull their ads in support of the cause. Facebook admitted that its current content evaluation system failed to identify and remove the hate speeches. It is currently in the process of improving the system and is expected to take down the offensive content from its page.

At least 15 companies, including Nissan Motors and Nationwide Building Society, have reportedly temporarily suspended display of their ads on Facebook. Other companies such as Zipcar Inc., Zappos.com Inc. and Unilever Plc (UL) however, have not pulled their ads from Facebook since it is taking necessary steps to correct the issue.

This is particularly a concern as advertising comprises a significant portion of revenues for Facebook (85% of total revenue). Moreover, Facebook has launched several new advertising products (Lookalike Audiences, Managed Custom Audiences and Partner Categories) for marketers. These initiatives have yielded positive results for the company as its advertising revenues have soared 43.1% year over year in the first quarter of 2013.

According to eMarketer, 64% of the U.S. advertisers have planned to increase their paid social media ad budgets in 2013. Another study by the same firm revealed that digital ad spending in the U.S. will increase in double-digits through 2014. We believe that Facebook’s massive user database and investments in the advertiser-pro products could be the prime contender for grabbing a chunk of the ad revenues.

Thus, resolving the current issue is a priority for Facebook and a stricter content evaluation process should be initiated so that such occurrences are averted in the future.

Nonetheless, Facebook remains a formidable force in the online ad market because of its massive user base and its ability to track personal details that advertisers exploit.

However, a volatile macroeconomic environment and increased investments to expand mobile offerings are expected to hurt margins in the near term. Moreover, competition from Google (GOOG) and Yahoo (YHOO) remain headwinds, going forward.

Currently, Facebook carries a Zacks Rank #2 (Buy).

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