Is It True Face Value?

Watching, listening or reading any reporting of Facebook™ and its latest earnings “beat” via the mainstream business/financial media, you would be hard-pressed to find anything but praise. All you hear is how “impressive” the following metrics were:

First: EPS (earnings per share) was a “solid beat!”

Next: Revenue was up Y/Y. And they “added even more MAU’s!” (monthly active users.)

All sounds fantastic, and maybe it is. However, here’s what we seem to not be hearing, anywhere, unless you want to start digging harder and deeper than a coal miner.

In regards to the “First”: Earnings was a beat – as long as you use what Mark Zuckerberg proclaimed a few years back ( e.g., circa May of 2017) to the then delight of “Wall Street.” But to those of us that actually have some business acumen saw it as a pure, calculated, predatory maneuver to backhandedly “knee-cap” any possible rising stars in the eyes of big investment houses everywhere with the proclamation…

Facebook will, for the most part, only report numbers that come from Generally Accepted Accounting Principles or GAAP. It will limit the numbers it reports that don’t follow GAAP rules.

Specifically, Facebook is no longer reporting non-GAAP expenses, income, tax rate, and earnings per share (EPS), it says. It will still use non-GAAP numbers in limited ways, such as to share with investors the impact of foreign exchange rates on its revenue, and to give insight into free cash flow. 

But it is getting rid of non-GAAP numbers for the meat-and-potatoes portion of its results.

“Facebook Embraces the GAAP” -Business Insider™

But it’s different this time, right? I mean, 2017 is sooo ancient history, right? So with that said, here’s the true “beat” when using GAAP vs Non-GAAP. To wit:

GAAP EPS of $0.91 misses by $0.94

Facebook Report Q2 2019 -Seeking Alpha™

Yes – that miss is larger than the actual number.

But hey, remember, back then is also the same “ancient history” when Mark told everyone via news conferences and more that he was going to work and work really hard to solve anything concerning any bias issues and more.

I guess “it’s different this time!” Or, is it the same? I don’t know any longer and can’t keep up.

And, about all those newly added MAU’s…

Where did they come from mainly? Hint via CNBC™: Europe? Nope. Numbers were flat. U.S. and Canada? Combined users went from 186 million to 187 million. That’s in favorable rounding error territory if you ask me.

“So where are all these new users coming from?”, you ask. Great question, maybe this has something to do with it. Because Asia is the growth story for Facebook.

But then again, Asia is also known for something else known as “click fraud.” But saying anything like that is something that’s just for “conspiracy theorists,” correct?

Well, here’s just a sample video that shows how “users” are created and used. And, as always, I’ll let you be the judge. Again, to wit:

Via YouTube™ (How ironic, right?)

Speaking of Google™, they also just reported better than expected earnings. However, there is just one thing that seems to catch my eye every time I hear some company announce how they are going to apply Non-GAAP accounting in certain areas so that “investors” have truer, more representative number to analyze when trying to read just how profitable a company truly is. You know, like what’s left after expenses. And we all know giving out stock shares like you’re the Federal Reserve just slamming the print button whenever the cause arises was beginning to be seen (more like ridiculed) as something that should be placed in the debit column. After all, it is an expense regardless of how one wants to “bend” the rules of math.

So it is in that light that this little line in Google’s, I’m sorry, Alphabet™ report just kind of made me chuckle when I watch these next-in-rotation fund mangers give their “insight” into why these numbers are just “hitting it out of the park.”

When comparing Y/Y a Non-GAAP measurement is used to compare the numbers as if there wasn’t a fine of $5 Billion needing to be surrendered to the EU in 2018. So the “operating income was adjusted from $3,045 MM to $8,116 MM for 2018 to 2019’s $9, 180 MM.

All sounds fine, but then that word “fine” enters once again, as in, another one.

This time it’s March of this year (March 20th) to the tune of $1.7 Billion.

Now I know it’s all when or where one enters it on the ledger, along with when one actually cuts the check. But with that said, that would via the tried, true and trusted “back of the napkin” math that basically built the 19th and 20th century industrial revolution, turn that Y/Y comparison of 2019 from a $9,180 MM into a more subdued (or less than to use basic English) $7,480 would it not? (e.g., 9,180 – 1,700)

Now sure some of you are saying, “Well, Duh! But $7,480 MM is still a long ways better that the $3,045 MM reported with a $5 Billion fine, so there’s that!”

Well, there is – and there isn’t. And here’s why…

This is the third multi-Billion $Dollar fine levied on them (near $10 Billion and counting) in just as many years. i.e., Any so thought of (or reported) Y/Y growth comparison has been subsequently cleaved from their check book – and it doesn’t look like it’s going to stop any time soon.

Conversely, it appears there’s a risk for even more, and even larger ones on the horizon, for I haven’t even mentioned the U.S. and what may be “Coming down the pike” as we used to say back in Boston.

Are you beginning to see what I’m describing here? This is Non-GAAP at its finest. i.e., Report “great” comparisons today – book blood letting fines later – then compare them using whatever time table or “adjustment” you like. Just make sure the algos read it the way you want and will buy, buy, buy.

And if you think that might not be enough?

Announce you’re going to buy back $25 BILLION just to make sure they do. Yeah, they did that also.

So with that all said I just have one question that keeps nagging at me, and it’s this…

Is it all just coincidence that the two behemoths that make their money via “clicks” and “users” are the only two that for some reason always seem to get ever the more “clicks” and “users” even when the value of their own “clicks” is diminishing to paying advertisers?

I mean, if there are that many new “eye balls” and “user” interactions with ads and more. Why would the cost for buying one be going down? Think about it. Or better yet, replay the above video a few more times and come to your own conclusions.

Doesn’t mean I’m right. I’m just sayin’ because it seems no one else either will – or can.

© 2019 Mark St.Cyr