If you expected Facebook's (NASDAQ:FB) fourth-quarter results to reflect the popular narrative that the social media powerhouse is losing its mojo, well, the numbers just don't back that up. Despite its higher expenses for security and content governance, the company's revenue grew by 30% year over year, it beat expectations on profits, and Wall Street responded by rewarding the stock with its biggest post-earnings pop in three years.
In this segment from MarketFoolery, host Chris Hill and senior analyst Jim Mueller comb through the report and CEO Mark Zuckerberg's comments, ponder the company's growth opportunities (we're looking at you, Instagram Stories), and discuss its ongoing efforts to improve security and privacy. In less upbeat news, they also consider the recent revelation that Apple (NASDAQ:AAPL) has banned from the App Store a Facebook-owned research app. It targeted teens and paid them for the right to track their activities on various apps and web browsers. (It's not illegal, but also not exactly the sort of behavior Facebook wants to be caught engaging in right now.)
A full transcript follows the video.
This video was recorded on Jan. 31, 2019.
Chris Hill: Facebook's fourth-quarter revenue grew 30%. Profits came in higher than expected. Facebook shares up 12% this morning. That's the biggest gain for the stock post-earnings in three years. My first question is, are you surprised? Based on the coverage I've seen, there are definitely people out there who are surprised because 2018, from a headline perspective, not a good year for Facebook.
Jim Mueller: No, it was a terrible year for Facebook. They've been guiding more expenses because of all the scrutiny they've been under and everything else. I think what's helping to drive the results this time is that Mark Zuckerberg, the CEO, said, hey, guys, we're kind of done with those; we'll still have higher expenses than in years past -- I've got a quote here. "We've made real progress in many of these areas," about improving security, content, governance, data privacy, that kind of stuff. That's what everyone's been worried about. And Zuckerberg said, "We've made real progress in many of these areas. We believe we built the most advanced systems in the world, and in many cases, more advanced than any other company or government."
Hill: Well, that's bold! [laughs]
Mueller: [laughs] It is. If I was worried about Facebook's privacy stuff then, yeah, those words would go a long way toward relieving that worry. So, now, paired with that, they're saying, "OK, we're going to start paying more attention to building new ways for people to use the site and for us to get more ways for advertisers to get into these things." For instance, they have about 7 million total advertisers across their entire system. Only about two million of them are advertising on Instagram Stories, and Stories is growing pretty healthily. So one of the ways they're going to grow is to get more advertisers on Instagram Stories.
Hill: You mentioned the expenses. I think that's something that really needs to be highlighted here in this regard: A year ago, we were in this studio talking about how Zuckerberg had come out and said, "Look, we're going to be investing. We're going to be hiring people to focus on security." We didn't know what the numbers were going to be, but we knew expenses were going to be higher because he was very blatant about that, very transparent about that. Now, we've got a fourth-quarter report where we can see for ourselves what the expenses are. And they're still growing revenue, and they're still growing their profit.
Mueller: Yeah, they're still growing revenue. Not as fast as they had been. For the full year, they grew revenue by 38%. For the fourth quarter, as you said, they only grew by 30%, which means it was growing faster earlier in the year. Actually, for every single quarter of 2018, the revenue growth slowed down year over year as you went through the year. They're only guiding 24% to 26% for the first quarter this year. So, yeah, the expenses are still a big deal. But, we know where the expenses are going. They said they've grown their security employee base from 10,000 to 30,000 people over the past year. That's quite a big improvement. They're spending a lot of time and effort doing that. I think a lot of the enthusiasm in the market right now is, "Hey, it's working!"
Hill: "This wasn't as bad as we thought it was going to be."
Mueller: Yeah. But I still have a little bit of worry in the back of my mind. Zuckerberg certainly sounded enthused. "Hey, we've got the best in the world! Better than governments, even. We're hot stuff, right?" But in contests or battles like this, Facebook is always going to be on the defensive. They've got better AI at identifying bad actor posts, for instance. But those bad actors are not going to say, "Oh, darn, you got me! I'll go find someplace else to do this." They're going to say, "How do I get around what they've got?" And they'll find a way, and then Facebook will react, and they'll find another way. The offense here is always going to have an advantage. I'm worried that Facebook might sit back on its laurels saying, "Hey, we've got the best in the world," and not continue to fight the good fight, so to speak. And if they sit back, we could very well see them in front of Congress or the European Union again.
Hill: Also, [laughs] Facebook has to deal with Apple. I'm just going to read directly from a Wall Street Journal story. "Apple banned a Facebook research app for breaking its rules around data collection in an escalating battle between the tech giants over user privacy. Apple said it revoked Facebook's permission to maintain a research app that had targeted teens and young adults, paying them $20 a month to suck up their data and track their activity across different apps and web browsers. The tech news site TechCrunch reported on the Facebook research program earlier this week."
Mueller: This is just bizarre!
Hill: It is a little bizarre. It's a couple of things. It's bizarre. It bears watching.
Hill: And, this kind of flies a little bit in the face of what you were talking about in terms of Zuckerberg saying, "Hey, we're out there, we're being good actors!" It's not that, necessarily, what they're doing here is illegal, but certainly, in the face of Apple, Apple has decided, "No, you're violating our terms. We're not going to allow this app in our store. We don't like what you're doing."
Mueller: That was my very thought. Facebook is saying, on the one hand, "We're protecting users' data," and on the other hand, "We're paying people to suck up that data." And Apple is saying, "No, that violates our terms because you're using something that's meant for research out in the public sphere." One quote I like is, what are people doing with the money they're being paid for? And one college student said, "Oh, I was buying video games and Axe body wash." [laughs]
Hill: Sounds about right!
Mueller: Sounds about right. This isn't the first time Facebook has done something like this, either. Everyone in this field is desperate to get data in order to figure out, for example, what your opponents are doing. Facebook did a very similar thing with Onavo a while back, another data-sucking app to figure out what people are doing. Before they bought WhatsApp, they'd noticed that people were using WhatsApp more and more, and that growth of that was skyrocketing, certainly faster than Facebook's own version of that. That led to Facebook's decision to pay, how much was it?
Hill: $19 billion.
Mueller: $19 billion for it, several years ago. And now it's a big growth thing for them. But they kind of cheated to figure that out.
Hill: It's going to be very interesting to see how this plays out, particularly because while Mark Zuckerberg is pretty reluctant to do media, Tim Cook is not. I would not be surprised if Cook were asked about this the next round of interviews he did.
Mueller: Another point on this is that Facebook only said, "OK, we're going to pull off this app," this latest one that they got caught on, after it had gotten out in the media. But Apple trumped them and said, "No, we're kicking you out.'
Chris Hill has no position in any of the stocks mentioned. Jim Mueller, CFA has the following options: long January 2021 $150 calls on Apple and short January 2021 $160 calls on Apple. The Motley Fool owns shares of and recommends Apple and Facebook. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.