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Facebook (NASDAQ: FB) and Pay Pal (NASDAQ: PYPL) released profit reports last week, and both surprised the experts. It turns out that Facebook eliminates negative discussions – and the heavier expenses badociated with upgrading security and content governance. Revenues were up 30% over the previous year, exceeding expectations in terms of earnings, and Wall Street responded by rewarding the stock for its largest gain in three years. At PayPal, however, profits fell by 6% and its expenses grew faster than revenues.
In this MarchéFoolery podcast, host Chris Hill and senior badyst Jim Mueller take a closer look at what's going on between these two companies and discuss details to which investors should really pay attention beyond the headlines. They also discuss a pair of disturbing movements of the C-suite at You're here (NASDAQ: TSLA) and Intel (NASDAQ: INTC).
A full transcript follows the video.
This video was recorded on January 31, 2019.
Chris Hill: It's Thursday, January 31st. welcome to MarchéFoolery! I am Chris Hill. Join me in the studio – we have a lot of news and fortunately Jim Mueller is here to help. Thank you for being here!
Jim Mueller: [laughs] Thank you Chris!
Hill: We have Microsoft. We have Visa. We will not get there. This is the week Earningspalooza. We have so much to do. We will probably get to these two on Motley Fool Money This weekend. For our current needs, we have the latest results from PayPal, we have executives who talk a lot about us.
We will start with the social network. The Facebook business turnover in the fourth quarter increased by 30%. The profits were higher than expected. Facebook shares 12% this morning. This is the biggest gain for action after profits in three years. My first question is, are you surprised? According to the coverage I've seen, there are certainly people who are surprised because 2018, from the point of view of headlines, is not a good year for Facebook.
Mueller: No, it was a terrible year for Facebook. They directed more spending because of all the scrutiny they were subjected to and everything else. I think what's contributing to the results this time is that Mark Zuckerberg, the CEO, said, "Hey, guys, we're done a little bit with those guys; we will always have higher expenses than in the past – I have a quote here. "We have made real progress in many of these areas" in improving security, content, governance, data privacy, and so on. This is what worries everyone. And Zuckerberg said, "We have made real progress in many of these areas, and we believe we have developed the most advanced systems in the world and, in many cases, more advanced than any other company or government."
Hill: Well, it's daring! [laughs]
Mueller: [laughs] It is. If I were worried about Facebook's privacy, yes, those words would go a long way in dispelling that concern. So now, paired with that, they say, "Okay, let's start paying more attention to creating new ways for people to use the site and for us to give more ways to advertisers to get into these things. "For example, they have about 7 million advertisers in total over their entire system. About two million of them only advertise on Instagram Stories, and Stories grows pretty well. So, one of the ways to grow is to attract more advertisers on Instagram Stories.
Hill: You mentioned the expenses. I think it's something that really needs to be emphasized here in this regard: a year ago, we were in this studio to explain how Zuckerberg had said, "We are going to invest in. We are going to be hiring people to focus on security. " We did not know what the numbers would be, but we knew that the expenses would be higher, because it was very flagrant on that, very transparent about it. We now have a fourth quarter report where we can see for ourselves what the expenses are. And their incomes are still increasing, and their profits are also increasing.
Mueller: Yes, they are still growing income. Not as fast as they had been. For the whole year, they increased their revenues by 38%. As you said, for the fourth quarter, they only increased by 30%, which means that growth has been faster earlier in the year. In fact, for each quarter of 2018, revenue growth slowed from year to year. They guide only 24% to 26% for the first quarter of this year. So, yes, expenses are always a big problem. But we know where the expenses are going. They said they have increased their number of security employees from 10,000 to 30,000 over the last year. It's a big improvement. They spend a lot of time and effort on that. I think the current enthusiasm in the market is, "Hey, it works!"
Hill: "It was not as bad as we thought."
Mueller: Yeah. But I still have a little worry in the back of my mind. Zuckerberg certainly seemed excited. "Hey, we have the best in the world, better than governments, even, we are hot, right?" But in contests or battles like this, Facebook will always be on the defensive. For example, they have better artificial intelligence to identify bad actor positions. But those bad guys are not going to say, "Oh, damn, you got me, I'll go find another place to do that." They will say, "How can I get around what they have?" And they will find a way, then Facebook will react and they will find another way. The offense here will always have an advantage. I'm afraid that Facebook is waiting for its laurels by saying, "Hey, we have the best in the world" and not continuing to lead the good fight, so to speak. And if they sit idly by, we can very well see them again in front of the Congress or the European Union.
Hill: Also, [laughs] Facebook has to deal with Apple (NASDAQ: AAPL). I'm just going to read directly from a the Wall Street newspaper story. "Apple has banned a Facebook search application from breaking its data collection rules as part of an unprecedented battle between technology giants for user privacy." Apple has canceled the Facebook permission to maintain a search application for teenagers and young adults, paying them $ 20 per month, to suck up their data and track their activity across different applications and web browsers TechCrunch technical news site has rendered account of the Facebook search program earlier this week. "
Mueller: It's just weird!
Hill: It's a bit weird. It's a couple of things. It's weird. You have to watch.
Mueller: Yes.
Hill: And, that sounds a bit like what you said when Zuckerberg said, "Hey, we're out, we're good actors!" It's not necessarily that what they're doing here is illegal, but, in the face of Apple, Apple has decided: "No, you're violating our terms, we're not going to allow this app in our We do not like what you do. "
Mueller: It was my very thought. Facebook says, on the one hand, "we are protecting user data" and, on the other hand, "we are paying people to suck this data up". And Apple says, "No, it violates our conditions because you are using something that is intended for research in the public sphere." One quote I like is: what do people do with the money they get? And a student said, "Oh, I was buying video games and the body wash product with the ax." [laughs]
Hill: Looks pretty much right!
Mueller: Looks pretty good. This is not the first time Facebook has done something like that either. Everyone in this field is desperate for data to understand, for example, what their opponents are doing. Some time ago, Facebook did the same thing with Onavo, another application that sucks up data to understand what people are doing. Before buying WhatsApp, they had noticed that people were using WhatsApp more and more, and that the growth of this activity was skyrocketing, certainly faster than Facebook's own version. This led to Facebook's decision to pay, how much was it?
Hill: $ 19 billion.
Mueller: $ 19 billion for that, several years ago. And now, it's a big growth for them. But they sort of cheated to understand that.
Hill: It will be very interesting to see how this happens, especially because if Mark Zuckerberg is reluctant to do media, Tim Cook is not. I would not be surprised if Cook asked questions about this in the next round of interviews he would have done.
Mueller: Another point about this is that Facebook only said, "OK, we're going to remove this app," the latter app that they got caught after being published in the media. But Apple cheated on them and said, "No, we're throwing you out."
Hill: Let's go to PayPal. Share a little this morning. Fourth-quarter profits fell 6%. PayPal's expenses increased further this quarter as revenues increased. I say, however, as a shareholder, I think that there is still a lot to like.
Mueller: Oh yes! With this company, I will not worry about variable income growth, as long as it is positive and healthy. With PayPal, I focus much more on the other numbers: the number of active accounts and their growth, as well as the number of transactions per active account. Both have evolved well. They recorded a record number of additions, 13.8 million new net additions to active accounts. All except 2.9 million were organic. This approximate figure of 11 million represents the largest organic growth ever recorded. It's really good news. And not only are more and more people using it, they use it more often. They are at 36.9 transactions per active account per month on a tracking basis. It's good. As long as they can continue to manage this, as long as they can continue to play, "We are going to be the mobile payment system of the world." No matter who you are, where your money comes from. , with which bank you do it, with what credit or debit card you want, we want to be in this transaction, "these guys are going to be fine.
Hill: The activity of Venmo continues to increase.
Mueller: Oh, 80% year on year on this one. And they are finally able to monetize it. They have the Venmo debit card, Pay with Venmo, where you use Venmo at a merchant and they get a bit of that deal.
Hill: They also have $ 10 billion in cash on the balance sheet.
Mueller: [laughs] Yeah. I'm not worried!
Hill: I have mentioned that we have leaders at the news this morning. I will ask dozens of listeners to stay with me for a minute. These are remarkable ads, possibly for different reasons. Tesla announced its fourth quarter results, and they also added at the end: "Oh, by the way, the CFO resigns."
Mueller: At the end of the teleconference! This is not even in the publication of the results!
Hill: That's Deepak Ahuja. If that name is known to Tesla shareholders, it's because it's the second time that he's chief financial officer and that he's resigning for the second time. This should not be confused with last year, when not one but two chief accountants resigned, one of whom resigned after a month of work.
Bob Swan is the other member of the board. Robert Swan. I do not know him at all, so I do not necessarily know him well enough to call him Bob. Acting CEO of Intel, who has just been appointed full-time. They removed the provisional label. It's interesting because the board was looking for a replacement and Swan was taking part in interviews over the past few weeks to explain how "we're going to have a new general manager." And they seemed to have blocked a candidate, fallen behind and could not close the deal for any reason. Thus, Swan, who was chief financial officer at Intel – Brian Krzanich, who held the position of general manager at Intel, resigned last summer, so they do Swan 's acting. And now he has the job, because apparently he was doing quite well.
I do not own any of these actions and I find these two stories disturbing.
Mueller: For different reasons, definitely. A little personal history here. My first paid interaction with The Motley Fool, before becoming an employee here, was to pay for an online seminar called When to sell. He gave several red flags, half a dozen or so, at a time when you really should think about selling your stock. And one of these was "the sudden resignation in the C-suite." If you look at Tesla – I've dug a bit – over the last four years, Tesla has had four different CFOs. In fact, two of them were the same person, Ahuja. Jason Wheeler held that position for 14 months before leaving it early in 2017. He announced to the same results two years ago that Tesla had just had, just before saying, "I'll be here until I get to what the 10-K is clbadified, then, goodbye. "Then Ahuja came back from his retirement to intervene, and he's been there for two years now. And now, it's Zach Kirkhorn – how do you say his last name?
Hill: We'll just call him Zach.
Mueller: Mr. Zach [laughs] mounts, he had a role in finance, but it escapes me for the moment.
Hill: But this is his first job as CFO.
Mueller: Yes. And for such a big company, it's scary. And not only the two chief accountants you mentioned, but also several other senior officials, the head of human resources. This kind of turnover at such a high level, or Musk is really hard to work, or something is going on. As an investor, it makes me really wary.
Hill: Yeah. As I said, it is troubling because, as you just said, there are not many reasons for that. If you examine the possible reasons for this type of revolving door in the Tesla Suite C, the menu is not very extensive.
In the case of Intel, this may be easier to explain. It's quite possible that they have a candidate that they really liked, and then they looked at the details of the negotiation, that sort of thing. Nevertheless, if you are Swan, you must feel a bit like you were a little shaken, just because you spent some interviews saying, "Hey, the board is going to have a new CEO We're excited about that." Blah , blah, blah. "And then, it's like," Oh, well, that person did not want to dine with us. Would you like to have dinner with us? " Like, it's the second clear choice here.
Mueller: Well, it's curious. What is even more curious is that when he was first appointed interim CEO at a meeting with employees, he said, "I do not want full work time". [laughs] At least according to a report from someone who was present at the meeting. And now, he has it. And he says, "I can not wait to go." But, I'm ready to cut back a bit on Intel's game. They had seven CEOs in 50 years. This is a very good record. Until last summer, Krzanich, who had been forced to leave because of a fault, violating one of Intel 's internal rules, had made a transition into sweetness of the directors of these CEOs – entirely, I believe, from the inside. So, between the problem of Tesla's chief financial officer and that of Intel's general manager, I am ready to further reduce Intel's game than Tesla's.
Hill: Yes, absolutely. Robert Swan, you look at his career, he was chief financial officer at, among others, General Electric and eBay. It is not left out. But I'm curious to see, as an badyst, where are the executives in your list of how you evaluate a company? When you look at a company and say to yourself, "Do I want to buy shares in this company?," how long in the process do you start looking at the leadership of the company?
Mueller: It's probably the second or third thing I look at. The first thing I look at is the sum of the financial statements, the cash flow statement, the balance sheet. Not so much the income statement. I want to see how money flows in the business and if it does. And, in the balance sheet, the stability of the company. If I like that and I like what the company does and what it is possible to do, I look at the direction. I want a team who, on the one hand, knows what they are doing, and on the other hand, who has been doing it for a while, or at least who has relevant experience. Appoint a long-time CFO to a CEO or COO position.
This is also related to what the board does. Part of the governance of the board, what they should have, is a kind of succession plan. Not only are the CEOs fired or resigned, but they die. McDonalds In 2004, Cantalupo died suddenly of a heart attack after being CEO of McDonald's for less than two years. They had a candidate, a person who could intervene quickly enough. I met another company, Wilhelmsen, which is an international transport company in Scandinavia. In 1989, they lost the first two layers of management in a plane crash. It took them a while to recover from that. It's probably more than you expected, but a council should definitely have a succession plan.
It's the suddenness that I do not like as an badyst. But if it's well planned and well thought out, and especially if it's telegraphed at the market, then yes, I'm cool with that.
Hill: Jim Mueller, thank you for being here!
Mueller: Thank you!
Hill: As always, program participants may have an interest in the actions they are talking about and the Motley Fool may have formal recommendations for or against, so do not buy or sell any stock based solely on this. that you have heard. That will do it for this edition of MarchéFoolery. The show is mixed by Dan Boyd. I am Chris Hill. Thank you for listening! See you on Monday!
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