On this episode of MarketFoolery, host Chris Hill chats with senior Fool analyst Jason Moser about some market news. Facebook (NASDAQ:FB) was up near an all-time high last week after the FTC levied a $5 billion fine. Yes, you read that right, and therein lies the problem with this FTC "punishment."
Citigroup's (NYSE:C) earnings were just ducky, in part because of a one-time boost in the form of a huge IPO.
Meanwhile, Amazon's (NASDAQ:AMZN) Prime Day strategy has really crystallized since its inception four years ago. It's not about the amount of sales; it's about some super easy self-promotion. Tune in to learn more.
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 July 15, 2019.
Chris Hill: It's Monday, July 15. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, Jason Moser. Happy Prime Day!
Jason Moser: Happy Prime Day! The first of two, right? Prime Day is not just one day anymore. It's maybe it's now Prime event. Prime week?
Hill: We're a couple of years away from Prime week. We're going to get to Prime Day in a second. We're going to talk about Facebook's news. Let's start with some earnings, though. Citigroup. Second quarter profits and revenue came in higher than expected. For those who don't know, Jason also hosts the Monday episode of our Industry Focus podcast, which focuses on financials. You're not going to be hearing about bank earnings on Industry Focus today.
Moser: No, no, no, you're not. You're not. It's a little bit of a different show today. As I'm running the augmented reality service here, I had an opportunity to interview the CEO and co-founder of a company called Upskill, his name is Brian Ballard. Upskill is in the business of building software for augmented reality devices in the enterprise. It was a really cool interview to talk about AR and how that is coming into play for businesses. I think most people like to think about consumer implications. This is more business-related. Really fun interview. Make sure to catch that!
Hill: So we've got this bank. Pretty much all the big banks are reporting this week. We'll almost certainly hit that in some form on this week's Motley Fool Money. But let's look at Citigroup for a second. This seems like a good quarter, although I should point out, we talk about one time events for different companies, and a lot of times it's a one time charge. This is a one time good event. They had an IPO in there that they did, and that juiced the numbers a little bit. Even if you back that out, it's still a good quarter. It's still a little bit better than expected. But the Tradeweb IPO that they had, that certainly helped.
Moser: Yeah. You never want to discount success. Even if it's a one time thing, we all want to hear about it. I've said it before, I feel like we're living in this adjusted non-GAAP world at this point anyway. The quarter was OK. I think on the surface, it was shaping up to be a challenging quarter for Citigroup and for the banks to come here because they are feeling some headwinds from all angles. Market volatility is keeping big trade clients at bay. Trade questions, obviously, still playing out. There's been no real resolution in regard to that. Interest rates. The interest rate environment right now is a challenging one for banks in general, because they aren't able to maximize profitability on their deposits. All of that together, it makes it a bit more difficult. Matt Frankel and I talked about, last week, what he was looking at for these banks coming into earnings season. He and I both were thinking that it's really a story about share buybacks first and foremost. A lot of that is because not only were banks buying back shares already, but they got the green light to buy back more shares. That certainly is what drives a lot of the earnings-per-share growth for Citigroup this quarter. They bought that 54 million shares. Between dividends and those buybacks, they paid up to about $4.6 billion that they returned to shareholders there. Now, if you take those 54 million shares into account, that essentially was about $3.5 billion of that $4.6 billion. Again, they just got the green light to do a lot more. I think that is the story for these banks in the coming quarters.
Hill: It sounds like you think, at least part of what we're seeing with Citigroup, we're going to see that theme play out later this week with Bank of America, JPMorgan, the rest.
Moser: I think chances are good. I do think Citigroup is the bank that faces more challenges from a consumer perspective than others like Bank of America and JPMorgan and whatnot. You think about it all the way back to 2011, remember, back right after the financial crisis, the mood regarding this bank was really sour. The move regarding all banks was pretty sour, but Citigroup even more so. They had that reverse stock split, that one for 10 stock split to try to get their share price out of the tank.
Hill: I'd actually forgotten about that.
Moser: You go back to that point in time, and we were all probably thinking, "Man, I don't want to own this bank, I wouldn't touch it with a 10-foot pole." Now, I'm not saying it's lit the world on fire since then. But it has been a decent investment. Not a great one. It's not beating the market. But you've made some money on it. So they've gotten their act together. End of period deposits were a little bit over $1 trillion, which was up 5% from a year ago. That's really the key there. You want these banks to keep on bringing in deposits, and then they can start lending that stuff out. What they need is a bit of a higher interest rate environment to make it a little bit more profitable on that front. It just sounds like it's not going to be coming for a while.
Hill: Shares of Facebook are basically flat today. On Friday afternoon, they closed within a few bucks of an all-time high. That was on reports from the Wall Street Journal and others that the Federal Trade Commission has approved a fine of $5 billion for the social network. I don't know about you, but when I saw that story late on Friday, I immediately thought of Scott Galloway and the interview I did with him a few months ago. This was in the works. There were different numbers floating around. I asked him, "What do you think about that?" I believe his answer was, "Put a zero next to that, and then yeah, it'll actually cause large tech companies to rethink things." $5 billion. Back of the envelope, that's a month's worth of revenue for Facebook.
Moser: Oh, yeah, I think you add at least one zero to that number to make it meaningful. The idea of a punishment is to change certain behavior. We can agree with that. I'm not saying that's the only reason, but that's a big part of it. You want to change a certain behavior. This fine is not something that commands Facebook to change any real behavior. They can afford this thing, no problem. You look at this company, they essentially have an endless pool of resources. The balance sheet is stacked with like $45 billion in cash. Zuckerberg can issue new stock whenever he wants, the market will eat it up. They've got an endless pool of resources. When you have that, monetary fines become less meaningful.
I have a hard time believing that this fine will change anything that they do. Now, if we see something other than this fine, if in addition to the fine, we see certain steps taken that make it a little bit more difficult for them to do things without being more transparent and upfront with how this affects privacy and whatnot, that probably makes a difference. If they have a higher burden to uphold, that works. I don't know that money is the answer, necessarily.
Now, I will say, and I say this all the time, I have a hard time reconciling that people ultimately value their privacy as much as the watchdogs would have us believe. The fact of the matter is, they're going there in posting their lives for all to see on that website every day. There is a little bit of responsibility here on the individual's part. But by the same token, there is an expectation, at least, to some privacy. Facebook has to uphold that part of the deal.
Hill: Even with the rise that we've seen in 2019 of this stock, and I think it's up about 50% year to date, it's still below where it was a year ago. When you look at the stock, do you think to yourself, this seems like a value play? Maybe not cheap. But when you look at the stock right now, what do you think in terms of how attractive it is for someone who has been sitting on the sidelines?
Moser: I'm not an investor in Facebook. I probably won't be. I'm just not into it, ultimately. But as an investor, you're hard pressed to make a case that this is going to be a bad investment. I think if you bought this stock today, in five years, you would look back and think, "I'm glad I did that." Once you get to that size, the network effect that's in play here is so unbelievably powerful. When you go beyond the Facebook platform, and all of these different properties they have, the different things that they can try -- that's one of the biggest risks to the business right now is, let's forget the antitrust stuff, right? It's more about privacy. They need to get through this privacy conversation and back on track so they can focus on the longer-term things that they're looking to do, whether that's augmented and virtual reality, or this Libra initiative, which I'm a little bit skeptical there. It's certainly going to take a lot longer than some optimists would have you believe. But the more time they have to spend on this privacy issue, that takes away from the time they could be spending investing on those other longer-term initiatives. I think regardless, they'll get there. It may delay the process a little bit. But yeah, as an investor, if you own the stock, you've got to be looking five years out and thinking, "This is a company that's poised to grow probably a pretty good bit."
Hill: I'm not saying it's not out there, but I've yet to see the article about Facebook's customers being unhappy. By customers, it's important to make the distinction between the consumers, who are the people who use the website, download the app, all that sort of thing, use it for free and post their information and their lives, and etc., and the advertisers, who are the customers. They're the ones who are paying Facebook, and they still seem pretty happy with the money they're spending.
Moser: I think you're right. Maybe we hit a point where Facebook, maybe they hit a ceiling where they can't realize as much pricing power on the ad side, as they would hope to. Mark Zuckerberg certainly has put it out there that he's more interested in making Facebook a more privacy-focused platform with the messaging stuff and the ephemeral nature that they're looking to pursue. We haven't heard anything about that since then. And I'm sure a lot of that is because of what they're having to deal with right now. But yeah, if you're an advertiser, Facebook and Google are the two big ones, and you have to be on those platforms. I don't see that changing anytime soon.
Can I say one more thing before we move onto our next story? I was thinking about this, a little while over the weekend, this whole $5 billion fine for Facebook. It won't mean anything for them.
Hill: For a quick second there I wasn't sure if you were going to talk about more about Facebook or destroying things at a molecular level.
Moser: You never really know! We can take it any number of directions here. That's part of the fun of the show. But it struck me, every time you see these types of fines, you think, OK, it's fairly meaningless to the company. But where does all that money go?
Hill: That's a good question!
Moser: So I started looking that up a little bit over the weekend, because I wanted to figure that out.
Hill: Are they throwing a big party at the FTC?
Moser: It's like, where does it go? I think it's a fair question. In most cases -- now, there are a couple of government agencies where this isn't the case -- but in most cases, apparently, all of this money goes to the Treasury for use, and I'm going to say it in quotes, because this is what they say, it goes to the Treasury for, "general use." That's kind of like when a company says they're going to issue a lot of debt, or they're going public, and they're going to raise this money for general purposes. This money essentially goes to the Treasury for general use. That basically means it's up to Congress to budget it. You want to talk about money getting sucked into a big black hole? At least if you felt like they were doing something productive with that money... but they don't really have this awesome reputation as terrific capital allocators. I don't know, it struck me as a question I wanted an answer to, and it seems like I got my answer. I just wonder how other people feel about that. I feel like you could probably do something a little bit more productive with that money.
Hill: It would be interesting if it just earmarked for a very specific purpose.
Moser: Building out our internet infrastructure around the country! Something! Take a bad thing and turn it into a good thing. Right now, they're taking a bad thing, and most likely turning it into a worse thing. I don't know!
Hill: Fingers crossed! It is Prime Day, both today and tomorrow. Prime Day started four years ago. It was a single day. Last year, Amazon expanded it basically a day and a half. Now it's two days. Although, for me, it actually started on Sunday, because I went to the Whole Foods near my home, walked over and was buying a couple of things. You get up to the checkout counter. "Are you a Prime member?" "Yes, I am." They're like, "Oh, you get a new bag." They had a new Prime-branded grocery bag that they were giving away.
Moser: A reusable one?
Hill: A reusable bag, yeah, to Prime members. I also learned this morning that apparently last week, they had a Prime Day concert.
Moser: I found that out today as well!
Hill: In conjunction, I'm assuming, to help promote Prime Music. Did we talk on Motley Fool Money... sometime last week, maybe it was on MarketFoolery, you and I talked about Lady Gaga and the cosmetics deal. That kicks in today.
Moser: You can pre order. That music event wasn't anything to thumb your nose at.
Hill: No, it was headlined by Taylor Swift.
Moser: It's some heavy hitters in the music world. I don't know. Every day for me is Prime Day. I'm ordering something from Amazon, it seems like, all the time. I don't know. Prime Day, as we say every year, it's the ultimate promotional tool, in order for the company to sell as much stuff as they can, but even more so, bring in more Prime members. The more Prime members, the better.
I actually had to look this up, because I didn't even realize what the Prime membership cost at this point. I've said it before, it could probably cost $500 and I would still buy it, because the math works out in my favor, just through toilet paper and dog food over the course of the year. $119. That's a pretty good deal for a year. And you get a lot of additional benefits from that.
I think if you look at it from the merchant's perspective, though, is where it becomes interesting. I want to go back to the shareholder letter from Jeff Bezos for this year and read out a couple of numbers for you. 1999, 3%. In 2018, 58%. That 58% ultimately represents the share of physical gross merchandise sales sold on Amazon by independent third-party sellers. What Amazon used to be was Amazon selling you Amazon stuff. What it's become is Amazon selling you a lot of other people's stuff. That's great for us, because it means we have more options, but it certainly shows also the status the company has with small business America. It's hard to justify not using that platform, given the tools that they've developed at this point.
Just like we were talking about with Facebook, how big that network is, and how valuable that becomes, there's a network effect in play here, too. The more businesses, the more individuals out there selling their stuff on this platform, the better it is for consumers because the more choices we have, the better prices we get. The big risk then just becomes a logistics one, and we're seeing that play out as Prime Day comes and goes. Part of the headline there is people wanting to boycott Amazon because of concerns on the labor side. I'm sure those are justified. I know that last week, you guys were talking a little bit about this big investment they're going to make in reeducating their workforce to go do other things as tech changes our lives. But yeah, this is a good reminder of how big Amazon is, and how important it is to a lot of people.
Hill: It's interesting to see one of the ripple effects here is to the other major retailers in America. You look at Walmart and Target and how they're responding with essentially trying to take advantage of the super high likelihood that a greater number than average of people are going to be doing online shopping. It's pretty easy to click from Amazon.com over to Walmart.com or Target.com. Target really trying to push their exclusive brands. But, to go back to what you were saying about getting people into the Prime membership, you think about the timing of this. I'm pretty sure if you go back and listen to four years ago, on this show, in advance of Prime Day, I maybe wasn't skeptical of it as an enterprise, but I looked at it as, come on, this is a made up thing, why are you doing this. It just struck me as a little bit cheesy at the time. But if you think about the two biggest retail seasons, and they are back to school shopping and heading into December, Thanksgiving through Christmas and Hanukkah, those. So, getting people into a membership before those two seasons makes it even smarter that the timing is what it is.
Moser: I think that's a very good observation. You're absolutely right! They're getting people in. And they're finding out new ways to do it, whether it's Lady Gaga's exclusive cosmetics line, I know they're working more on the fashion side, and they've got influencers on Instagram steering people toward Amazon today for deals. It's the easiest self-promotion in the world for the company. They could turn this thing on and let it go for as long as they want. You see them play some of those tricks. Create a little false scarcity. Buy now or else. It's another way for them to move a lot of stuff. If anyone who sits there and looks at Prime Day on its own, and takes that bottom line number away from it and says it was a success or it wasn't a success, is completely missing the point. We know how Jeff Bezos thinks. He is focused many, many years down the road. This is just one part of a very big overall strategy. Success for Prime Day isn't going to be dictated by the amount of merchandise they sell.
Hill: And it's a good reminder that the first Prime Day in 2015, there were people saying, "This didn't work," because of the logistical challenges, because of Amazon being accused of bait and switch, that the things that they were promoting early in the day were gone very quickly, that sort of thing. Are you going to buy anything?
Moser: I am absolutely certain I will buy something. I have a house full of kids and dogs. Something that needs to be done somewhere at some point. I feel like I always want to go in there and find some new home improvement tool to put to good use. I'm certain I'll be surfing around for one of those things later tonight.
Hill: That's more useful than me. I was thinking, "I wonder if they have some glow in the dark stuff on sale." Who doesn't like glow in the dark stuff?
Moser: Oh, I need to get my wife something! I have to find something for my better half. How about that?
Hill: There you go! By the way, when we were talking about Citi and one time events, and the larger point that context matters, here's the context. Amazon doesn't release sales numbers. They're not going to tell us a week from now, "Here's what we did." But there are ways that you can use things like eMarketer and things to ballpark what they did. Right now, it's looking like somewhere in the neighborhood of $5 to $6 billion in sales. Alibaba, on Singles Day, they're doing $30 billion in sales. On one day! [laughs]
Moser: That tells you a lot!
Hill: Jason Moser, thanks for being here!
Moser: Thank you!
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 MarketFoolery! The show is by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!