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Facebook's Q1 Earnings Show It Still Has Friends Where It Needs Them the Most

By Motley Fool Staff – May 1, 2019 at 11:53AM

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The "likes" keep coming from businesses -- and Wall Street.

Facebook's (META 2.18%) 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 last Wednesday, and the stock shot higher.

In this segment from MarketFoolery, host Chris Hill and Motley Fool Director of Small-Cap Research Bill Mann discuss why big advertisers can hardly avoid Facebook anymore, how our personal experiences with a company can mislead us about the strength of its business, and why even the news that the social media powerhouse was anticipating a $3 billion to $5 billion fine from the Federal Trade Commission over its privacy-related failures didn't stem the market's optimism.

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: 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.

Bill 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]-$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 FTC 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 certainty? 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. Five billion dollars, 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.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Bill Mann has no position in any of the stocks mentioned. Chris Hill has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.

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