As Expected, Facebook's Profits Count More Than Politics

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Bad publicity is never a good thing for a high-profile public company. Image matters, but when it comes to assessing the effects of negative stories on a stock, what matters most is how much long-term effect the negativity will have on profits. On that basis, the uproar around Facebook (FB) could actually prove to be a long-term positive.

Last week, I wrote a piece on Facebook. In it, I said that while the stock could be expected to fall early in the week as CEO Mark Zuckerberg was hauled before Congress to listen to some pompous speeches by politicians feigning outrage, or, as they put it, to testify before a committee, it would quickly recover, then get more of a boost from earnings.

I don’t wish to brag, but I could not have been more right.

The next day, FB lost around four percent as Zuckerberg endured his "testimony," hitting a low of 181.50, then gained half of that back the very next day. Yesterday, after reporting Q3 results, the stock jumped to around $200.

FB 20 day chart

That is not to suggest that I am some kind of genius. I mean, you don’t need to be particularly smart to realize that when it comes to a stock, profit trumps politics every time. What it does illustrate is that the numbers drive the stock, and Facebook’s numbers were very good.

They reported EPS of $2.12 versus expectations of $1.91 on revenue of $17.65 billion versus $17.37 billion. Daily and monthly active users both showed growth, with daily exceeding expectations as well, but the most significant beat was in another area. Revenue per user jumped to $7.26 versus an expected $7.09. The thrust of what I wrote last week was that the political pontificating didn’t matter as long as advertisers still saw value in Facebook’s platform. That number shows that they clearly do.

Ironically, the very thing that is upsetting people about Facebook is what makes it appealing to advertisers. The outrage is about so called "fake news" stories: lies, distortions and exaggerations presented as facts to influence voters. Call me cynical if you will, but it seems to me that if you replace the word "voters" with "consumers," you have what many would regard as a pretty good definition of advertising over the years. The political ads only worry people because they are effective on Facebook, and that is a good sign for other advertisers.

Obviously, if increased regulation involves FB losing the revenue from political ads it would hurt, but nobody is proposing that we make social media an exception to the first amendment and ban all political advertising there. Twitter (TWTR) may be voluntarily refusing political ads, but that is very different from government mandating such a ban.

Nor is there anybody really saying that nothing should be done on the basis that the fault lies solely with idiotic consumers. That may well be true, but we protect consumers from themselves in a lot of different ways already. What is being touted though, is similar to the system that other media companies deal with, where there is an internal fact-checking system that screens content, and an enforcement body that punishes the outlet if they air things that break the rules.

No business likes regulation, but if that is what comes out of this, everybody wins. The public gets protected from its own inability to differentiate between fact and fiction, the politicians get to say they did something useful for once, and Facebook gets increased trust in their products. What they have shown over the years and continue to show is that they are better than anybody at turning that trust into cash, and as long as that continues, their reputation among traders and investors remains good. There will probably be a bumpy road as the headlines come and go, but on that basis, the stock can be expected to climb higher from here in the long term.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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