Facebook's (FB +0.98%) numerous lapses and issues may have earned it the ire of users and regulators, but there's one group that still loves it: advertisers. And given that in the land of social media, "users" are actually the product, and advertisers are the real customers, theirs are the opinions that matter. Apparently, their opinion is that they want to spend on that platform: Facebook reported record high first-quarter profits after the closing bell Wednesday, and the stock shot higher. Also moving higher, Microsoft (MSFT 0.95%), which briefly was the only member of the $1 Trillion Club on Wall Street Thursday.
In this MarketFoolery podcast, host Chris Hill and Motley Fool Director of Small Cap Research Bill Mann discuss the ups and downs of both of those tech powerhouses, and put their current conditions in context for investors. They also reflect on the ugly earnings loss Tesla (TSLA +0.07%) just reported for Q1, and dig into the background on the bidding war between Chevron (CVX 1.60%) and Occidental Petroleum (OXY 3.12%) for Anadarko Petroleum (APC +0.00%).
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
This video was recorded on April 25, 2019.
Chris Hill: It's Thursday, April 25. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio... Bill Mann. I paused because mad props to Bill Mann for being here in the studio, and mad props to our man behind the glass, Dan Boyd, for being there, because both were up late last night watching a double-overtime hockey game.
Bill Mann: Yes, that didn't work out the way that the Washington Capitals fans would hope. I was at the game with my son, who was a train wreck this morning at six when I woke him up to send him to school. One, the Carolina Hurricanes won the game; two, they won the game not too long before he had to get up to go to school. All credit to Carolina. It was a great game! There's no question who... is this a sports show? Let's do a sports show! Let's just break into sports! There's no question who the better team was last night.
Hill: We would do more sports if there was nothing going on. There's actually a lot!
Mann: [laughs] That's right! I was about to apologize. Yes. We're not exactly for want of filler today.
Hill: Yeah. We've got Microsoft, we've got Tesla, we've got a fascinating drama playing out in the oil industry, and we will get to all of that.
But we will start with Facebook. Shares of Facebook are up 5% this morning. Record highs for their quarterly profits and revenue. I was reading some of the coverage this morning, I was watching some of it on CNBC, and I was reminded of how personal experience with a publicly traded company can color the way we think in negative ways.
Mann: Can we go a little bit of a different direction on this?
Hill: Sure.
Mann: I want to talk about the FTC fine.
Hill: OK. I was going to say; part of this story is Facebook coming out yesterday and saying that they have set aside somewhere in the neighborhood of $3 [billion to] $5 billion for a privacy-related fine that they are expecting from the Federal Trade Commission.
Mann: A privacy-related fine. And look, I can use the word allegedly, but I think we can agree, the FTC probably has them.
Hill: Oh, yeah! I don't think we need to use the word "allegedly."
Mann: I think we have to use the word "allegedly."
Hill: Well, Facebook came out yesterday and said, "Yeah, we've got this enormous pile of money" -- which they can totally afford -- "and we've set it aside because we expect this."
Mann: Not only can they totally afford it, can you imagine a situation in which Company X comes out and says, "We've set aside $5 billion for fines," and then in the next hour or so, the market cap of the company increases by $35 billion? Because that's part of a great earnings report? For me... I think it's obvious that there are some deep privacy concerns with Facebook, but I really worry about the fact that the government is fining them at a level that doesn't really hurt. It's seven weeks' worth of cash flows for Facebook at this point. The role I think government should play, and I don't think it's playing it here with Facebook, is the government ought to be a counterbalance to the largest companies in the world. In this case, I almost feel like the government's a bit of a co-conspirator to Facebook by virtue of fining at a level that has commas in it, it sounds like a lot of money, but for Facebook, it isn't. How is it going to deter any of the behavior that the FCC is saying that they are engaging in or have engaged in?
Hill: Part of the enthusiasm that we're seeing in the stock today is related to this report.
Mann: Yes! [laughs] Of course!
Hill: But also, an assumption -- and at this point, it is an assumption, that if the FTC comes out, and let's just say it's the high end, let's say the FTC comes out and fines Facebook $5 billion -- there's an assumption that that will be the end. The old adage of, "the market hates uncertainty," well, now we'll have certainly? That's an assumption, folks. There's nothing that says that the FTC doesn't come out and say, "It's $5 billion. By the way, this is not the end."
Mann: Right. But companies can operate on assumptions on how the government is going to act for an awfully long time. Let's just pull in maybe the worst example of our lifetimes, which was, the government was basically a co-conspirator, if you will, with Fannie Mae and Freddie Mac, in terms of whether the government was going to back up those companies' debt or not in the event of a meltdown, which was never going to happen, because housing doesn't go down. Assumptions are things that can both hurt and help companies over the long run if you don't know what the government's going to do.
In this case, great! The FTC may be saying that they will continue to fine. I would suspect that there will be some change in behavior. But there's no deterrent built into that number. I view a deterrent being the cost of the damages times the percentage of chance that they're going to get caught. $5 billion, as big as that sounds, isn't it, and the market is telling us that today.
Hill: To go back to what I was saying at the beginning about how our personal experience with any public company can color the way we think about the business -- the easy example is, "I don't like eating at this publicly traded restaurant; therefore I'm going to short the stock." In the case of Facebook, there are plenty of people out there who delete their account or delete the app off their phone and say, "I'm shutting this down. I'm closing my account." Always remember who Facebook's customers are: the advertisers.
Mann: [laughs] Right, you're the product.
Hill: You're the product. The advertisers are the customers. Talk to advertisers, or just read the quotes from ad firms that talk about things like, A, how well their ads are performing on Facebook; and B, how Facebook has gotten to the point with Google, I would argue, where there's almost no way you can have a viable digital advertising strategy that does not include it.
Mann: I guess, here's where I need to go back and apologize to you for completely blowing off that question the first time you posed it. It's exactly right. Again, to go back to what this fine is, it says that not only is that the case, but one of the competent jurisdictions which could make that go away could affect Facebook's extreme value and extreme dominance in advertising, doesn't seem like they're going to do it.
Hill: Let's move on to Facebook. Shares of Facebook -- wait, not Facebook, Microsoft.
Mann: Like I said, nothing going on today! [laughs]
Hill: I wasn't even up watching the game! [laughs] Microsoft shares are hitting a new all-time high. Strong third quarter report. Briefly this morning, shares were up enough that Microsoft crossed the magical $1 trillion market cap mark. It's come a little bit below that. This was another great quarter. For all the talking we do about Amazon Web Services, let's take a moment and talk about Microsoft's cloud. Azure is crushing it.
Mann: I'm so glad that you brought that up, and brought it up in the context of Amazon. First of all, by the way, yeah, congratulations to Microsoft joining Club Trillion, at least for a while. It has a membership of one, now back to zero. A lot of people think of AWS and Amazon Prime as being among the most powerful, valuable business franchises, recurring revenue models in the history of mankind. But Azure and, really shockingly, Microsoft Windows and Office, I think are even more valuable in terms of being a recurring revenue model. They weren't for a long time. It was, you'd get a computer, it came bundled in it. But they've done an amazing job at Microsoft, turning themselves into an automatic recurring revenue model. The only reason at this point that you're going to leave Amazon is, I don't know, if you die? You go out of business, merge, whatever it is. You remember, the theme for years around Microsoft was, "Oh, poor Microsoft! They're getting crushed by Apple. They're getting crushed by Google." It's not like Microsoft this entire time was the Zune, or the PC. They've really turned themselves around, and a lot of really smart investors weren't paying attention to it.
Hill: Yeah. And even those years when Microsoft was not really buzzworthy, the for lack of a better term, because they would try and come up with these things like the Zune -- and certainly the Surface tablet. The early versions of that were not as great as they are now. But even then, when they didn't really have the buzz factor, when Steve Ballmer was running the company and they were just floundering, it was still a company that was turning out a lot of cash, to go back to what you were saying, because of those franchises, because of those recurring revenue streams they had.
Mann: The first person who tipped me off to this was former Fool analyst Matt Richie. He said, "Look at the cash that they're generating." Because it wasn't a tremendous growth model at the time, people just ignored it. The interesting thing to me about Microsoft and this quarter's results is, all three of their major segments are just crushing it. They generated $30 billion in revenues, up 14%, in areas that you just wouldn't even think have that type of growth left in them. Those are fantastic, huge numbers for Microsoft.
Hill: Satya Nadella would not accept the credit if you were to give him all of the credit. But holy cow! [laughs] The transformation of this business under his leadership has been incredible. And by the way, every now and then we take a victory lap on this show. There are CEOs on conference calls, every now and then, they take a victory lap. He could have taken a victory lap. No. There's no chest-beating, no jersey-popping with Satya Nadella.
Mann: Just, "Here's our conference call." "What do you have?" "We killed it." [laughs]
Hill: He's the embodiment of the servant leader.
Mann: Embodiment is right. I actually think much more highly of Steve Ballmer's leadership than I think he's given credit for. He took the reins from the true founder of the company. Things were going OK in various places under the surface, at a time in which Microsoft's bread and butter, which was PC sales, were first starting to tank. But, yeah, embodiment is the exact right word. He's calm, he's impressive, and I think that people no longer view Microsoft is this sweaty, slightly overweight mess. Which is harsh, but is probably true.
Hill: Let me share with you a headline from Business Insider from late January. "Elon Musk Says Tesla Will Be Profitable For 'All Quarters Going Forward.'"
Mann: [laughs] Going forward!
Hill: Cut to the last 24 hours, when Tesla posted a loss for the first quarter.
Mann: Not even a loss -- this was a Dumpster fire of a quarter. I don't understand how it is that Tesla shares aren't down 20%. They literally missed on every metric that you would look at and say this is something that you would like to see a good company do. Their revenues were shy of expectations by about $400 million, which is a lot. I go back to something I learned from The Motley Fool Investment Guide back in the day. There are a couple of tip-offs that tell me the struggles at Tesla. Their total revenue dropped $2.6 billion from a year ago, and their accounts payable only dropped by $155 million, so there's some real stress within Tesla. I'm really surprised that the shares are holding up as well as they are.
Hill: Yeah, the stock is only down about 3% or 4% today. Look, I don't own shares. I'm not short this company. I'm agnostic. I'm not a hater.
Mann: I'm not either!
Hill: But I do look at this, and I just think to myself, how bad things have to be for the stock to actually drop 15%, 20%?
Mann: I've long described Tesla as a mutant company. First of all, let's remember that Tesla founded a new model in how you even sell cars, how they're built, everything else. So for any company to have generated $4.4 billion in revenue in a quarter as a new car company, to me, it is amazing. I think that we sometimes get caught up in the expectations game. But the sheer fact of what Tesla has done and what Elon Musk has done is amazing. But, they are pulling some threads. Their platforms, the Model S and the Model X, they had sharply lower sales. There's a refresh, and I don't know where the capital is going to come from to do it.
Hill: Let's move on to the oil industry. A little bit of background here. It was two weeks ago that Chevron made a bid for Anadarko Petroleum. I think the initial bid was somewhere in the neighborhood of $33 billion.
Mann: That's right.
Hill: I think either same day or within 24 hours, Occidental Petroleum came out with a competing bid. By competing bid, I mean a higher bid. We'll get to the numbers in a second. You and I were going back and forth on Slack yesterday. You said to me, "Can we please talk about this?"
Mann: Yes! It's the first big hostile takeover bid that I can remember in quite some time. There are a couple of really interesting things about this.
Hill: Let me interrupt.
Mann: I'll hold the interesting.
Hill: No, no, I was just going to say, I neglected to mention that when that news first broke, that Chevron has made this bid for Anadarko Petroleum, all of the coverage had this tone of, "Well, this all seems neat and tidy. It's just a matter of dotting the I's and crossing the T's." And the Occidental bid appeared to have come out of nowhere.
Mann: What Occidental has said over the last 48 hours was that they had been making bids to Anadarko prior to the April 12 announcement from Chevron. They were ignored. If this is true -- and I have no reason to assume it wouldn't be true -- Occidental was trying to get onto their dance card for a long time before this. Occidental did what we market watchers love to see. They went public with a much higher bid, $38 billion vs. the $33 billion. Anadarko is evaluating whether $38 billion is better than $33 billion. I mean, I have a math answer for this. [laughs]
Hill: [laughs] The shareholders may have an answer.
Mann: Yeah. It depends on whether it's cash and stock. But there is precedent of a company accepting a lower dollar amount bid because they think it's going to be a better fit. Another really interesting thing that happened with Anadarko is that just the day before the announcement came out that Chevron wanted to buy it, the CEO and the CFO had the terms of their contracts changed so they'd get a much higher payment for severance in the case of a merger. Al Baker [Al Walker] will potentially receive $66 million, should the Chevron bid go through.
Hill: Let's get back to the numbers for a second here.
Mann: Oh, I said Al Baker, Al Walker is actually the name. I apologize Al Baker. I'm sorry, one, to not say nice things about you; and two, you're not getting $66 billion no matter what.
Hill: I love to think that somewhere, there's a listener named Al Baker whose eyes just lit up like, "Wait, I'm getting what?"
So, Chevron has a market cap of around $225 billion. It is dramatically larger than Occidental Petroleum. If you just look at the market caps, it's like, wait a minute, doesn't Chevron have much, much deeper pockets than Occidental Petroleum, and therefore isn't that where this is going? I mean, I get that if you're Anadarko, you're like, "Look, Chevron, we know how big you are. I know we had a deal at $33 billion, but now the price has gone up a little bit." If Chevron wants this, they can make this happen, right?
Mann: Yes. Chevron's saying they're unlikely to raise their bid, which is probably what they should say. [laughs] But in the meantime, Anadarko is probably doing the smart thing, like, "Well, we're figuring out whether 38 is more than 33." [laughs] They've got their abacus out.
Hill: Occidental Petroleum, their market cap is about $47 billion. Where are they coming up with $38 billion?
Mann: There are these crazy things in America, Chris, called banks. They're going to lever up to take on Anadarko.
Hill: And nothing bad will happen.
Mann: No, no! The spreadsheets say that everything will be just fine. But these are mergers that absolutely should happen. There should be consolidation in this industry. Anadarko has some really, really attractive assets for whoever ends up winning.
Hill: I totally get why shareholders of both Chevron and Occidental would be excited for this to go through. These are stocks that have been treading water for a while.
Mann: Yeah, nobody's paid attention to them for quite some time. Being a really, really heavily capital intensive, natural resource E&P company, it just hasn't been that exciting for investors for quite some time. Welcome to your days in the sun.
Hill: It's going to be a fun drama to watch play out. Bill Mann, thanks for being here!
Mann: Thanks, Chris!
Hill: As always, people on the program may have interest 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 Market Foolery! The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you on Monday!
