Zuckerberg's Plans to Spend Big on Security, Abuse Prevention Give Investors Pause

In this segment of the Motley Fool Money radio show, host Chris Hill, Million Dollar Portfolio's Jason Moser and Matt Argersinger, and Total Income's Ron Gross discuss the reasons that rapidly rising profits and user numbers were not enough to buoy Facebook (NASDAQ: FB) shares on Friday.

CEO Mark Zuckerberg handed out quarterly numbers that were excellent by any measure. However, when he discussed his intentions to put real money not just into content, VR, and the like but also into security and the prevention of abuse of its platform, he got some investors worried about margins.

A full transcript follows the video.

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This video was recorded on Nov. 3, 2017.

Chris Hill: Facebook shares falling a bit despite third-quarter revenue growing nearly 50% year over year. Profits up big too, Matty, but Mark Zuckerberg's comments on the call scaring off at least a few investors.

Matt Argersinger: They've been warning for a while that revenue growth was going to slow down, especially in the second half of 2017. We're still waiting for that. As you pointed out, revenue was up almost 50%, 47%, in the third quarter. That's up from 45% growth in the second quarter and, the operating margin expanded from 44% to 50%. There are very few companies, let alone ones as big as Facebook, that can have a 50% operating margin and be growing as fast as they are. Net profits were up huge. On the engagement level, daily active users up 16%, monthly active users 16%. What I think they're concerned about, as you pointed out, is that they're going to be stepping up investments, especially in 2018. And a lot of that is going to go to content, connectivity, AI, AR, VR stuff they're doing, but a lot of it is going to go to the security stuff to ensure quality and abuse prevention. I think that's going to be critical, especially when 2018 is an election year. Just, are we going to be talking about this in six months, nine months? I don't know. I mean, I'm glad they're taking these steps. It's important. I don't think Facebook is a company that understands its own influence and how big it can be. So, that's a medium to long-term worry for them. But, I don't know, the results are so impressive that the growth is really going to take care of all these problems, I think.

Hill: And, again, the investments that they're going to make, particularly in security, I think that's what has a few investors saying, well, the margins have to come down, right? Unless of course, the ad platform in six to 12 months is even more robust, an even better experience for everyone involved, and therefore Facebook has pricing power and margins not only stay the same, but possibly even get better.

Argersinger: It's possible. They've been warning about the ad load problem for months now, almost a year, and that hasn't been a problem if you look at the advertising revenue they're pulling in. It's just so impressive.

Chris Hill has no position in any of the stocks mentioned. Matthew Argersinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.