foxex: Settled

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Wednesday's Headlines

1. Dow Tumbles as S&P 500 and Nasdaq top Record Highs

2. Tesla Misses

3. Facebook Settles with the FTC for $5B

4. Boeing's Long Runway to Recovery

Markets Closed

Dow
27,269.97 -0.29%

S&P
3,019.56 +0.47%

Nasdaq
8,321.50 +0.85%

VIX
12.07 -4.28%

Bitcoin
$9,722.78 -4.19%

US 10-Yr Yield
2.05 -1.16%

Markets Today

Dow tumbles as Industrials report weak earnings
Nasdaq and S&P 500 close at record highs
Investors shrug off regulatory fines and probes
Facebook pays a $5 billion fine, then crushes Q2 earnings

U.S. markets were split today as the DJIA sold off on weaker than expected earnings from industrial stocks like Caterpillar and a warning from Boeing that its plans to resume 737 Air max production may be delayed even further.

Meanwhile, the Nasdaq and the S&P 500 hit new record highs on the strength of semiconductor stocks like Texas Instruments and a big earnings beat by UPS.

Tech giants Facebook, Amazon, Apple, and Alphabet's Google were all under the microscope today as the Dept. of Justice revealed that it is "reviewing the practices of market-leading online platforms," with a view towards determining whether they have "reduced competition, stifled innovation, or otherwise harmed consumers." While not naming the aforementioned companies, everyone knows who the Justice Dept. is talking about.

Meanwhile, Facebook agreed to the largest settlement in its history—and in the history of the Federal Trade Commission—for violating its users' privacy. More on that, below.

Tesla Misses, Again

Tesla was among the many companies that reported earnings after the market close today, and the news wasn't good. The automaker reported an operating loss of $167 million dollars or $1.12 per share, which was nearly triple analysts estimates. Tesla generated $6.35 billion, which was also below estimates. The company did hit a milestone for production and delivery of its popular Model 3 during the quarter, selling 95,200 vehicles and producing 87,048 cars during that period.

It also brought in $2.4 billion from a secondary equity offering and a debt sale, which brought its cash on hand to $5 billion—a record for the company.

Why is that important? Because no one likes to spend money like Elon Musk. The company expects to spend $1.5 to $2 billion in capex in the third quarter as it builds a Gigafactory in Shanghai and starts production of the Model Y. While that's a little lower than earlier forecasts, it's a huge spend for a company that continues to lose money despite having a very popular product. But when investors are willing to buy your debt, why not?

Tesla shares are down 10% after-hours and were down 22% year to date before its earnings release.

Facebook's $5 Billion Settlement over Privacy Abuses

Pays $5 billion in historic FTC fine
Promises "fundamental" changes
Investors keep bidding the stock higher

As expected, Facebook reached a settlement with the Federal Trade Commission over user privacy abuses stemming from a violation of a 2012 order the social network made with the Commission whereby it admitted to "deceiving users about their ability to to control the privacy of their personal information."

Translation: Facebook has been making money off of its users' personal data for years, even after it agreed not to, and finally owned up to it and wrote a big check.

Why it Matters

This settlement has been rumored for weeks as Facebook has had to defend the way it uses its 2.7 billion members' personal information to make money. Facebook makes a lot of money using that data, to be sure. The company made $55.8 billion in revenue in 2018 and not all of it was through unscrupulous practices, to be sure. But, by settling with the FTC for $5 billion—and with the Securities and Exchange Commission for $100 million related to its dealings with Cambridge Analytica leading up to the 2016 U.S. presidential election—Facebook has admitted that it has been deceiving its users and promised, "a fundamental shift in the way we approach our work and it will place additional responsibility on people building our products at every level of the company. It will mark a sharper turn toward privacy, on a different scale than anything we've done in the past."

Here's what Facebook agreed to do, per the settlement:

Facebook must exercise greater oversight over third-party apps, including by terminating app developers that fail to certify that they are in compliance with Facebook's platform policies or fail to justify their need for specific user data;
Facebook is prohibited from using telephone numbers obtained to enable a security feature (e.g., two-factor authentication) for advertising;
Facebook must provide clear and conspicuous notice of its use of facial recognition technology, and obtain affirmative express user consent prior to any use that materially exceeds its prior disclosures to users;
Facebook must establish, implement, and maintain a comprehensive data security program;
Facebook must encrypt user passwords and regularly scan to detect whether any passwords are stored in plaintext; and
Facebook is prohibited from asking for email passwords to other services when consumers sign up for its services.

The FTC was quick to point out that the settlement with Facebook is the largest in its history, and it is rather large...but not for Facebook. It amounts to less than a quarter of the company's 2018 net income of $22.1 billion.

Facebook's Response

Facebook's CEO Mark Zuckerberg posted his response on the company's blog earlier, promising structural reforms to the way it build products and runs the company. As CEO, he will also have to personally sign off on quarterly reports to verify that his company is complying with the terms of the settlement.

Investor Reaction

With the bad news seemingly behind it (for now), investors shrugged off the $5 billion fine, sending shares up a little over 1% for the day. Facebook also reported its second quarter results after the close which showed that it generated $2.6 billion in net income on $16.8 billion in revenue. It would have generated closer to $5 billion in net income, but it put aside $2 billion for the FTC settlement. Its revenue per user, $7.05 on average, worldwide. If you are a U.S. user, it's $33.27, on average.

Facebook shares are up 5% in after-hours and more than 55% so far in 2019.

Clearly investors don't think the company will be broken up or its ambitions to unify its 2.7 billion users across Instagram, Messenger and WhatsApp in one encrypted messaging platform will be thwarted.

Boeing Posts a Historic Loss

Reports a second quarter loss of $5.82 a share.
Delivered 104 fewer airplanes in the second quarter compared to the same quarter last year.
737 Max jet remains grounded after two fatal crashes, and the company can't say when it will return

Boeing reported a second quarter loss of $2.9 billion earlier today as losses continue to pile up in the wake of the grounding of its 737 Air Max jet in the wake of two fatal crashes. The aerospace giant delivered only 90 planes in the quarter, down from 194 in Q1. Last week Boeing took a $4.9 billion charge against its earnings due to the grounding of the 737 Air Max jets and for potential lawsuits it is facing from victims' families as a result of those crashes.

The company had planned to resume delivery of the 737s in the fall pending approval by the FAA after a software upgrade, but today it said it is uncertain about when it will be able to do that. Shares of Boeing fell 3% today and are down 15% since March 11th, the day after the fatal crash of an Ethiopian Airlines 737 Max Jet that killed all 157 people aboard.

More News:

The Uphill Battle for Apple's Services Strategy

Snap Stock Soars After Strong Q2 User Growth

Boeing Stock Could Underperform Into 2020

chart courtesy www.koyfin.com

Edwards Lifesciences beat their Q2 earnings estimates this week, causing an almost 10% change in the medical equipment company's stock price. Shares of W.W. Grainger rose by just over 9% after the industrial supply company reported an increase in profits, despite revenue missing Q2 estimates.

Although Rollins matching its earnings estimates, the consumer and commercial services company's stock still decreased by over 10% due to revenue falling short of expectations. Meanwhile, MarketAxess lagged behind its earnings estimates, resulting in an over 9% drop of the financial technology company's shares.

Word of the Day

Net Income

Given today's heavy focus on corporate earnings (or losses), we thought it important to remind everyone what the bottom line is really all about.

Net income (NI) is equal to net earnings (profit) calculated as sales less cost of goods sold, selling, general and administrative expenses, operating expenses, depreciation, interest, taxes and other expenses. This number appears on a company's income statement and is an important measure of how profitable the company is.

photo courtesy www.sanfernandoblog.blogspot.com

Today in Financial History

July 24, 1987:

The corporate assets of ZZZZ Best Co. are sold at bankruptcy auction in Los Angeles for $62,000. Less than four months earlier, the carpet-cleaning company run by 21-year-old whiz kid Barry Minkow had a stock-market value of roughly $300 million, and the stock had more than quadrupled since in initial public offering in 1986. But ZZZZ Best (pronounced ze best) had virtually no customers, revenues or assets, and Minkow had set up an elaborate system of phantom offices and phony account records, even bribing a building owner to pretend in the presence of an outside auditor that ZZZZ Best was cleaning his carpets. Minkow learned a lesson, serving five years in federal prison, but its not clear whether his investors did.

The Wall Street Journal, July 27, 1987, p. B4; Keith Slotter, The CPAs Role in Detecting and Preventing Fraud, FBI Law Enforcement Bulletin, vol. 68, no. 7 (July 1999), p. 5.