Braving winter storm Toby to bring you this episode of MarketFoolery, host Chris Hill and Motley Fool contributor Tim Hanson take a look at some of today's biggest market stories. Facebook (NASDAQ:FB) is in dire straits this week, and it's going to take some significant and well-considered moves from management to right this ship in light of the user privacy scandal. Tesla's (NASDAQ:TSLA) shareholders are voting on Elon Musk's proposed compensation package -- a package that's left a lot of analysts and investors scratching their heads. More Nordstrom (NYSE:JWN) drama today, as the company finally put the kibosh on discussions with the founding family about privatization. Tune in to find out more.
A full transcript follows the video.
This video was recorded on March 21, 2018.
Chris Hill: It's Wednesday, March 21st. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio today, investor at large Tim Hanson. Thanks for being here!
Tim Hanson: It's my pleasure!
Hill: The office is technically closed.
Hill: And by technically, I mean officially. Fool global headquarters is officially closed, but somehow I was able to convince you to make the trek through the snow, and our man behind the glass, Taylor Harris, subbing in and helping out today. Thanks for making the trip!
Hanson: Yeah, it's always nice to be on the show when you either can't get anybody else or I'm the only one who lives close enough to the office to get here.
Hill: You're on more often than that! Come on! Come on now, that's unfair. Even if it's ...
Hanson: "Everybody is on vacation this week, so we got Tim Hanson, investor at large, in the studio!" "We got a foot of snow on the ground outside, but Tim ran in because he only lives a mile from here!"
Hill: Is that how I make you feel? I apologize. That's terrible.
Hanson: No, no, it's always a pleasure.
Hill: Well, if it makes you feel any better, I have some stories today that are right up your alley that I know you have opinions on. Let's start with the ongoing saga that is Facebook.
Hanson: Yeah, wow!
Hill: It's up a little bit today, which means it's only down about 10% this week. We were talking right before we came in the studio, the optics right now are, I think, as bad as they have ever been for Facebook, in terms of the questions they're facing and the fact that pretty much everyone -- and I'm going to go ahead and include employees, if we are to believe the reports where employees, off the record, are saying, "We want to hear from leadership, we want to hear from Mark Zuckerberg, we want to hear from Sheryl Sandberg," and they are nowhere to be found right now.
Hanson: It's interesting, reflecting on all of this volatility at Facebook. I went back and read "The Accidental Billionaires," which is the book upon which the movie The Social Network was based. One of the things that's striking about the controversy that Facebook finds itself in right now is actually what a reputational repair job they'd done over the past three or four years, because when they came public, the stock was down and there were all sorts of questions about the ethics of the founding of Facebook and so on and so forth.
Hill: Which was right on the heels of the movie, too.
Hanson: Exactly. And I think people didn't think Mark Zuckerberg was that good of a guy. And go back a year, there he was touring Iowa, seemingly getting ready to run for president or something like that. And now, it seems like he might be back at square one, with this revelation that they played very fast and loose with data and are handling this more like damage control than a serious problem that needs to be solved.
It's really troubling, what they were allowing app developers to do. It'll be interesting to find out their motivation for allowing app developers to have access to that much data. Clearly there are profit motives there, as well. But, I think this is a serious problem, particularly as regulators around the world get involved. Regulators, the FTC, when they got involved in the Whole Foods-Wild Oats merger, basically put three years of Whole Foods growth on hold while they tried to sort that out. They could ostensibly do the same with regards to Facebook, in terms of having executive leadership really take their eye off of strategy and have to deal with lots of legal things, instead.
Hill: When I think back to when Facebook went public, and let's just put aside the questions at the time, the business questions about mobile ad revenue, because that was one of the reasons that, I think, particularly the first six months that Facebook was a public company, the stock was down, there were legitimate questions about, how are they going to monetize mobile? And they have answered that brilliantly. But there were also questions about Mark Zuckerberg, and not just in terms of, is he a good guy or not, but also, given his relative youth, his casual appearance, there were people who were, I think, not with any malice, but rightfully asking, is this someone who can lead this company? And as you indicated, partly through reputational repair, he's done a great job of that. And part of that is building a leadership team around him with Sheryl Sandberg.
But, to go back to the data, that's one of the great ironies of what they're facing right now. For the longest time, what we've all said and what advertisers have all said about Facebook is, Facebook knows everything about us. They have all the data about us. And the irony of this situation is, Facebook may have all the data on us, but they appear to have very little information on the developers that they let essentially run loose inside their platform.
Hanson: Yeah. It's almost very naive, what they thought people would use their platform to do. Either naive, or they didn't care. When you have developers on your platform, it behooves you, there's an incentive, to allow them to make things that get people to engage, to get people angry, to get people making more comments and things of that nature, because it leads to more ad impressions. So, why didn't they crack down on misleading news stories or fake users or political advertising that would not have been up to the standard that it would have to be on TV or radio? Is it because they were ignorant about it? I find that probably the least likely scenario, because Mark Zuckerberg and his team may be a lot of things, but they're certainly not stupid. If it's not because they didn't know, then why? And if I had to make a guess, it was probably because it was helping their business perform really strongly.
Hill: Who do you think we're likely to hear from first? Sheryl Sandberg or Mark Zuckerberg? Because one of those two people needs to come out -- I've been trying to think about this just from a communications standpoint. I've talked before about Steve Ells at Chipotle, and how he mishandled their food crisis early in that process, and as it turns out, repeatedly, botching it from a communications standpoint. So, I've been trying to think about Facebook in terms of, what is the thing that would be the most effective? Would it be a sit-down interview with no conditions, where someone from Bloomberg or CNBC or whoever can just grill Zuckerberg? I truly don't know what it is, but what I do know, I can only come back to things that he's done in the past that aren't going to cut it this time. There have been times in the past when they've had privacy concerns raised, where Zuckerberg has done a straight to camera video for 10 minutes, and he's talked about how committed they are to fixing this. I don't think that's going to work this time.
Hanson: Yeah, it's a good question. I think they've had a bias in the past toward using their own platform to disseminate information about themselves. He often posts things on his own Facebook account at hopes people read them, and so on and so forth. I'm not a crisis manager, I don't know what the right solution is here, because like I said earlier, I think this is a revelation that, obviously this is not the only developer who accessed this data and probably used it for, maybe you could call it malicious purposes. I don't necessarily know the right word. Certainly, everything wasn't on the up-and-up with regards to how they were intending to use this data or distribute this data to other people. They're certainly not the only developer who did that. How many more cases like this are there out there? How many did Facebook know about? I think it's hard to respond to a problem until you reveal the full scope of it, so, that would probably be the next step for the company, if they care about coming clean about it. But if they want to approach it with more of a damage control mentality, I suspect you'll see a different strategy.
Hill: Yeah. The only advice I have, and I'm not the only one offering this advice, is that the communications people at Facebook who are getting hung up on the phrase "data breach" --
Hanson: Yeah, clarifying, "It's not a breach."
Hill: They're saying, "Technically, it's not a breach." It's like, technically, you really need to let this go. [laughs] You need to move on. That is the language equivalent of rearranging deck chairs on the Titanic.
Hanson: Yeah. I've never had a Facebook account, and I've often chided my wife for hers, because, from its very origin, it never seemed like a company that respected its users or customers in a way that was mutual respect. Obviously, they've done a fabulous job of creating shareholder value and changing that perception over the last couple of years. Are the recent revelations the exception, or are they the rule? I think that's the interesting story to come out, and that will have huge implications for the company from here.
Hill: They report earnings in early May.
Hanson: That'll be a fun conference call.
Hill: I was just going to say, in addition to any questions --
Hanson: Or, maybe not, because maybe they won't take any questions. [laughs]
Hill: Whatever questions they get, if they decide to take them, it'll be interesting to see what the actual numbers are, in terms of engagement. We see a little anecdotal stuff here and there of people --
Hanson: It's March 21st now, so we probably won't see any effect on engagement in the quarter. But, if they give guidance, it might show up there.
Hill: Let's move on to Tesla, because Tesla's shareholders are voting today on Elon Musk's compensation arrangement, which is not based on how many vehicles they're going to deliver, it's based entirely on a rise in Tesla's market value over the next decade.
Hanson: Well, because he's ... No, sorry, continue. I was going to say something mean.
Hill: If you're a shareholder, how are you voting on this?
Hanson: Oh, I think it's a terrible pay package. It doesn't take into account shareholder return, it's rather just a complete expansion of the value of Tesla the corporation. But, as you know, as everybody knows, Tesla is probably going to need to raise money. Whether they succeed at fixing their production issues or not, the company does need more capital. One way they can get that is through debt. One way they've also done it historically is through convertible debt, which is debt that then converts into equity or more shares. Or, they can do additional offerings of shares, which would inflate the share count.
I think those last two things are both very likely, which means that the value of Tesla could increase market cap while shareholders reap little to no per share return, and yet Musk will still do quite well in that regard. So, I think it's a poorly designed package. And the sarcastic point I was going to make earlier was, he's been better at saying things that inflate the price of the stock than at doing things that increase the number of cars they produce, so in some ways the pay package lines up with his skill set. [laughs] He probably likes it that way.
Hill: And the package is not dependent on him remaining CEO of Tesla, it's dependent on him remaining an officer of the company. So, when this first got floated, I remember looking at this and thinking, the possibility of him stepping away from the day-to-day responsibilities of the company is probably increased ever-so-slightly with this package.
Hanson: In his defense, because I'm not only antagonistic toward Elon Musk, he's obviously done many very fascinating and interesting things, I think he's said in the past in interviews that -- and he obviously works with SpaceX in addition to Tesla, and he also has his Boring Company -- I think when he talks about Tesla, he says that were he to step down as chief executive officer, he would remain chief engineer or chief designer, something of that nature. And I think that's probably where his skill set is best utilized, apart from the job of CEO of inflating the stock price by talking to the market, because he's clearly good at that, as well. I think it's possible that he could step down from the day to day responsibilities of CEO but still remain very influential with the company in terms of how it creates its products and markets them to customers.
Hill: The saga of Facebook continues. The saga of Nordstrom trying to go private, I don't know if it's ended, but one chapter has certainly ended, because Nordstrom has ended discussions with the founding family members about taking the company private. The two sides could not come to an agreement on price. I'm a little surprised by this just because, when the Nordstrom family made the opening bid, it was truly laughable, because the stock was trading at $52 a share, and the family said, "OK, we'll buy it out at $50 a share." The board smartly said, "No, that's less, we're good with the basic math and we're going to pass on this one."
Hanson: Well, you can't judge that until maybe a couple of years go by, right? $50 could look pretty good in hindsight.
Hill: And that's the thing. I thought, OK, they're just making their opening bid. Of course they'll come back with another bid. And apparently, if I'm reading the tea leaves correctly, the family is sort of digging in their heels and saying, "Look, the only reason the stock is as high as it is is because we came out late last year and said we were interested in doing this."
Hanson: That's really interesting, because there have actually been a couple of merger and acquisitions cases that have gone to Delaware Court recently around this topic. It's fascinating because usually, a deal will take place, somebody will acquire it at a price a little bit higher, probably, than the share price that it was trading at. And often times, some shareholders will sue for a higher price, thinking they're not getting fairly compensated. And usually, the people suing, the plaintiffs, generally did pretty well. They'll either settle, or the court would rule in their favor. There was a recent case where they sued and they ended up getting less than the takeout price, because the court came back and said, "No, the fair value was whatever it was trading at the day before the merger, because the market is efficient."
And it's hard to argue with that, in some ways. Right? To the point of the Nordstrom family, if the stock is elevated because people think they're going to buy it, why should the value they're going to create as the owners all go to the shareholders who can't create it? In some ways, they're right to potentially offer a price that's more than what the company might be worth run by present management, but less than what it would be worth, in their assessment, if they were running it in a better way. It's a very interesting emerging section of shareholder law.
Hill: Do you think they sit back and wait for this thing to drop a little bit, and just say, "How's that $50 a share looking now?"
Hanson: I mean, it's not a crazy strategy. Certainly for a physical retailer, you don't want to overpay these days. So, yeah, if they know what they think their company is worth and they're confident in that, there's no reason to overpay. Nobody is going to swoop in on top of them, I don't think.
Hill: Tim Hanson, investor at large, thanks for braving the snow!
Hanson: My pleasure.
Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show is mixed by Taylor Harris. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
Chris Hill has no position in any of the stocks mentioned. Tim Hanson owns shares of Facebook. The Motley Fool owns shares of and recommends Chipotle Mexican Grill, Facebook, and Tesla. The Motley Fool recommends Nordstrom. The Motley Fool has a disclosure policy.