Motley Fool Hidden Gems Investing - A Tesla For Everyone

Episode Date: October 19, 2023

Can Elon Musk build a $30,000 EV that everyone wants to drive? (00:15) Tim Beyers and Deidre Woollard discuss: - Tesla’s compressing margins. - Robots with brains and Tesla’s take on the AI universe. - How Netflix is becoming a global television network. (22:28) Deidre Woollard interviews real estate industry insider Greg Robertson on the impact of lawsuits against the National Association of Realtors. Claim your Stock Advisor discount: www.fool.com/mfmdiscount Companies discussed: TSLA, NFLX, RDFN, RMAX, HOUS Host: Deidre Woollard Guests: Tim Beyers, Greg Robertson Producers: Ricky Mulvey, Mary Long Engineer: Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. tesla wants to make cars cheaper and netflix wants to make streaming more expensive motley fool money starts now welcome to motley fool money i'm deidre woolard here with motley fool analyst tim byers tim it's tesla netflix day how are you doing fully caffeinated ready to go thanks deidre You kind of have to be fully caffeinated today. Oh, my gosh. Right? I feel like I could devote hours to Tesla's earnings call. I had it on. I was listening to it out on a walk last night. I may have been laughing. I may have looked like a crazy person.

But let's talk a little bit about the earnings first. The market did not like it, but revenue was up. Yes, margins are shrinking, but that was sort of expected. What's happening here? Well, the margins are shrinking by a lot. So, I mean, we should be clear. As I look at this, if I have it right here, the overall operating margin percentage last year, Q3 of 2022, 17.2%, down to 7.6%. So, that is 964 basis points. That is a lot, Deidre. So, I could see why, Because this is something that Musk has kind of been threatening for a while. In fact, there was a point, if I remember correctly, and please do correct me if I'm wrong here, where he said, we could just sell cars at cost and this would be what happens.

You just get your Tesla, we sell it to you at cost, and then all of the add-ons and all of the features, because really it's the software that matters, things like full self-driving and other sorts of features, are the subscription that you will keep coming back for and keep paying for and generate huge margins for Tesla over time. Now, that is entirely unproven and theoretical at this point. But Musk seems determined, Deidre, to drive his competitors absolutely insane by driving cost out of the EV market. In other words, just selling, you know, I mean, it's almost crazy Eddie style. It's low, low prices. Everything must go. I mean, That really is where we're at here with Tesla. The bad news for those competitors and why I think the

report is better than expected, Deidre, is that even on that low operating margin, Tesla is still generating cash flow. Part of the reason for that is they're moving inventory. As long as they can do that, as long as Musk can generate and squeeze cash flow out of Tesla, real excess cash flow out of Tesla while keeping margins incredibly low to the point where they can get out a really low-cost electric vehicle, I think it's going to be a big problem for the rest of the industry. I'm less concerned about those operating margins, but it does seem to be that that's what's causing a bit of angst on the street. Yeah, absolutely. You're right, he has said that before. He had a quote on this earnings call

that I thought was really interesting. He said, if our car costs the same as a RAV4, nobody would buy a RAV4. Clearly, he's thinking he can just get the cost down to an appropriate level and Tesla takes over. That seems like Musk hyperbole. What do you think? Oh, it's totally hyperbolic. If you had an Elon Musk truth meter and you ran it under the comments that you were watching on YouTube, there would be spikes in different places. I would say the spike on this one is a modest spike, but not a huge spike. I don't think it's a lie here. But I do think Tesla does have a meaningful brand. If Tesla becomes way more affordable to the point where it's just pure parity, if you could have a gas car or have an electric

and it's Tesla and the Tesla arguably costs you the same or lower, I think Tesla wins a lot of sales. So I think he's hyperbolic, but not entirely wrong. Okay. Well, let's put your truth meter to the test. We're going to go in a different direction. Another comment from him around AI and full self-driving. First of all, he said that Tesla has, I believe he said the best AI team bar none or something like that. But he also described the AI system inside the cars and full self-driving as baby AGI, which means artificial general intelligence. Given that AGI is still not even really a thing. How much is he overstating things here? Oh, he's overstating them by a lot. I mean, I love that, you know, baby AGI or is it like,

that sounds like the next Musk child. I mean, that is really what it sounds like, you know, A.G. Musk. I could see that, you know, coming sometime here soon. But yeah, it's way too early to make any kind of claims on generative AI as it relates to Tesla. And honestly, I mean, one of the most terrifying things I can think of is generative AI inside of a car, where a car is inferring its own decisions about which way it should go. I would prefer that the car be programmed, and the generative AI in this case is inferring how to execute instructions like play inside the sandbox, but I don't want a wild, unbound generative AI inside of a car because errors inside of cars lead to very bad things. They

lead to catastrophic results. So yeah, it's way too early. This one spikes pretty big, Deidre. All right. Well, gear up because we got one more I think will really spike it, which is about the development of Optimus. So that's its humanoid robot. You know, Musk has trotted this out thing on stage a couple of times. Last time it sort of walked. Now he says it can do yoga. Maybe that was a joke. Who knows? but one of the things he's telling us and he told us this about the car too is it learned it'll learn by seeing and uh he said it has a brain unlike those parkour doing robots over at boston dynamics but he's refusing to give us any specific details about optimus so the way i look at this it's a non-factor for the financials sort of at this point or at least it's not a factor we can completely see but is it a distraction for the core business or is it is this something that eventually plays out as a benefit for the factories. I don't think any of us want the

optimists in our homes, really. Right. I certainly don't. That would feel creepy. But what I will say is that this feels like a toy. It does feel like a distraction. Is it a terrible distraction? Tesla's generating cash flow. Don't take your eye off the ball. This is a company that is competing at a bare-knuckles level, has a huge amount of cash, a very good balance sheet, is generating cash flow. And as long as those things are true, robots are no robots. Tesla is a competitor, a fearsome competitor that is dangerous to the rest of the industry. Cute robots, notwithstanding. They don't even matter at this point.

So, I look at Optimus as like, whatever. I mean, is this because Elon liked his Transformers as a kid, so he's naming it Optimus? I really don't know, and I don't care. I recognize I'm being maybe a little bit uncommonly bullish on Tesla for this quarter, because I've really hammered them on the operating margin. But as an investor, you have to be willing to be flexible in your thinking. Here's how I'm going to be flexible in this area, Deidre, is that I think I'm just setting the robot off to the side. I'm looking at what he's doing, deliberately killing those operating margins, driving costs down as far as he can drive them while still generating cash out of the business, if that trajectory can continue and it gets leverage points through

things like AI or better robotics for better manufacturing and driving down the unit economic costs of producing cars, and that really hammers the mainstream car competitors, then Tesla will be fearsome. He is a fearsome competitor. There is some serious hyperbole detected throughout this earnings report. But don't take your eye off the ball. This is a fearsome competitor that is doing some interesting things that are showing up in the financials right now. Whether or not this continues, now the other side of this, Deidre, is that he's driving down the cost right now. What if this isn't sustainable? What if the leverage points aren't there and the operating margin goes down to 3%, and now all of a sudden, all of the cash flow disappears.

And then Elon Musk is telling us, don't worry about it. We'll make it up on volume. Then we should really worry, because that isn't how it works. You still have to be profitable at the unit economic level. But he seems to be driving towards it. And as long as that's true, I'm very interested to see what happens here. Yeah. And I think you make a good point there too, Tim, with the idea that some of the things that attract media attention are distractions, but we also don't need to focus on them. One of the things that they didn't talk a lot about on the call, but was really important in the earnings was the growth of supercharger connectors, supercharger stations, and also home storage. Huge growth areas for the company that

they don't talk about. There's still a very, very small part of things, but an area of consistent growth. No question. And as a network, the Tesla network, which includes those superchargers, that being essential for widespread adoption of EVs across this country and arguably around the world, those are Tesla branded. That's a Tesla branded supercharger network. Tesla is making this happen. And so, that does have some brand value. And so, again, if you can get price parity with gasoline-powered vehicles, does Tesla become EV of choice in the market? I think the answer is could be. And that supercharger network will certainly help. So, there's a lot still to be done. And Elon is so hyperbolic that I could be giving him too much credit right now. But I looked

at those numbers, Deidre, and I said, you know what? Sometimes you have to tip your cap. And if you are going to kill your operating margin by 10 percentage points, which is essentially what happened, and you can still squeeze cash out of the business as a result, that's a feat that I am not willing to ignore. Well, and the other question mark, of course, is ye olde Cybertruck, which, you know, another thing that hasn't gone well for them on stage, that moment with the breaking glass will kind of go down in infamy. But this was a subdued Musk on the call, and he was saying it's going to take 18 months at least for the Cybertruck to be profitable. They talked a lot about the sort of innovations that have gone into it. I've tried to sense what's happening

here. Is he over-promising to under-deliver, or is there something else happening with the production of the Cybertruck? They talked about some November deliveries. They're trying to get things out, but I'm still pretty skeptical here. What are you thinking? Well, I'm skeptical too, but I find it fascinating that just think about what you just said there. Is he under-promising to over-deliver. It's staggering that we can even say that, because that's not even in the realm of what Elon Musk typically does, like ever, about anything. He never under-promises and over-delivers. He always over-promises and under-delivers until he finally delivers. That has been the prototype forever so it's really interesting that this is happening i just think this is one of those

niche products that has a hardcore audience but it's a small niche audience and we know it and since we know it's never going to be a really mainstream audience musk is going to deliver for those hardcore enthusiasts, and he'll get to it when he gets to it. That's the way I read it. Deidre, they'll get to it, but it's not really a priority growth driver for Tesla. What's really the priority growth driver is that under $30,000 economy car whenever they can get to it. That's the real emphasis for Tesla moving forward. Yeah, I think that's correct. Well, let's move on to Netflix. The market loved this. First of all, because of the subscriber numbers, you get 9 million additions there. But the part of this that I really found fascinating

was this idea that 70% of Netflix's members are now outside of the US. They've now got a foreign exchange hedging program because they've got exposure to 45 currencies, which just sounds a bit mind-boggling. But how does that change maybe how we think about Netflix as a whole? This is something that's been true about Netflix for quite some time, that they have the world's first, and I've characterized it this way, the world's first global TV network, where they have a global subscriber base, and everybody is logging in. And those 250 million or so Netflix subscribers around the world, they have direct relationships with Netflix. And that is not the way the entertainment business typically has worked. It's been very disaggregated. You have producers, and then you have distributors, and then local channels. And so, those local channels or cable subscribers, they'll be the

ones that have the relationships, and they're different from the content producers. All of that stack has been compressed since really the beginnings of Netflix as a digital content company. But they've been international for so long now, Deidre, that they have a long tail of content and where they get a lot of value, and you could see it in the numbers this quarter, where they get a lot of value is when a program or a movie starts in one territory and becomes a hit in other territories. Now, very often, it's U.S. programming that gets exported to other territories, but it's come the other way. It has happened and it's continuing to happen. Squid Game was the big one, but there are other ones. There's content coming from South

America. There's content coming from Asia. There's content coming from Europe. Every time that content travels from where it was produced to another location, there's an arbitrage opportunity and the margin gets fatter and fatter and fatter. This is a company that's on track to generate over $6 billion, according to management, over $6 billion in free cash flow this year alone. Now, some of that, to be very fair here, because we have to put a big caveat on it, is going to be because of unspent content money due to the writer's strike and the actor's strike. So, we have to put that in context. Setting that aside, though, you're still talking about a company that is generating billions upon billions of dollars in free cash flow at a time

when the other streamers that are primarily U.S., with maybe the exception of Disney, which is a global brand, are struggling to generate consistent profits as a streaming business. And Netflix does not have that problem. They haven't had that problem for a while now. And so I think the conditions for Netflix to keep growing profitably for a very long period of time are just outstanding. The tailwinds are blowing briskly, Deidre. So they talked a little bit on the call and in the earnings about the growth of the ad tiers, which is great. That's impressive. But how long can they talk about this before they actually give us some numbers? Because every quarter, I think I'm like, they keep saying it's growing,

still not material yet. When? When do you think? I mean, that's hard to say, but I'll tell you what, the fact that they are raising prices on their most premium ad-free tiers should tell you that they love the idea of driving people to the ad tier. The reason I think they love it is because it's a very high-margin business. They don't need to get a lot. I believe it's $6.99, and then they get the benefits of the ad revenue on top of that. The combined average revenue per member that is on the ad tier must be absolutely awesome. It doesn't matter how much the revenue is, but the average profit for that member must be absolutely astronomical, and that drives free cash flow. The fact that they're raising prices to move people into that

tier is really interesting. There's an interesting stat from the report here, Deidre, that 30% of new subscribers came in on the ad tier. You have to believe that Netflix management is absolutely giddy about that. So not material yet. Will it be material in a year? Maybe. I don't know when we get the data, but we have enough anecdotal data to say this is going really, really well for Netflix. Yeah. Well, there's so much that I liked in this report. it. There's one thing that this move, I'm not sure I like so much. So they've been doing these tie-ins lately. They've got like the Scoops Ahoy ice cream. They've had these different pop-ups. Now they're doing this Netflix house, which they're going to have sort of, it sounds like revolving

kinds of exhibits and things like that. It's not parks. They've made it clear they're not doing what Disney or Universal does. They said there's limited CapEx. They're not throwing tons of money at this, but I don't know. I I'm a little suspicious. Tell me I'm wrong. I don't know that you're wrong. I'm a little suspicious too. Although if it's, what do they call those, those rooms, like escape rooms, if you have like puzzles and escape rooms and things like that, and they're Netflix themed inside these little Netflix houses that give you an experience of the Netflix programming, you don't have to have rides, but you have to have something that is an activity and fun, then okay, maybe there's something there. But I'm a little dubious

about this too. The beauty of Netflix is that it is a capital light business model and they are investing in capital that has a very long tail that can generate profits even in very, very tiny niches just by being content that exists in one part of the world that finds its way into other parts of the world. The economics of this business are good and getting better. The one thing I don't want to see and the thing that could kill the thesis for Netflix is capital that gets wasted in the wrong areas. Here's one that we just want to be like, maybe watch cautiously, but the big one, Deidre, and the unanswered one is the gaming part of the business, which is still really new and not yet determined how Netflix applies capital to gaming over time is going to be a trend that we

all as investors are going to want to watch because the economics of the streaming business for Netflix have been brilliant. The economics of the stream gaming business, we have no idea, but if it is anything like the economics of the streaming business, watch out. This will once again be one of the largest companies in the world. Wow. Well, thanks for your time today, Tim. This is great. Good to chat. Thanks, Deidre. The analysts you hear on the show have a whole other day job, providing premium coverage and recommendations for The Motley Fool's suite of stock investing services. We're giving our

listeners a discount on Motley Fool's flagship service. It's called Stock Advisor. If you're interested in more analysis from our team, two stock recommendations per month, and access to Stock Advisor's full scorecard of companies, visit www.fool.com slash MFM discount. The National Association of Realtors is one of the country's biggest lobbying organizations. It's also right now one of the most troubled due to lawsuits and moves by Redfin and other big brokerages. I sat down with industry insider Greg Robertson to break down what is happening. You just found out that your sales team is at risk of missing quota. Don't panic.

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Sign up for exclusive access today, rippling.ai slash fool. The National Association of Realtors has been one of the most powerful organizations in the United States for over a century and has over 1 million members. Now, a series of lawsuits and some moves by talk brokerages could change all that. I'm here today with Greg Robertson. He's been in the real estate services industry for several decades, and he hosts the Industry Relations podcast about real estate from the inside. I just thought he was the perfect person to talk to about all of this and what it really means. So Greg, break it down for us. What are the NAR lawsuits about? Yeah, thanks for having me, Deidre. I appreciate it. And NAR has 1.6

million members, right? So it's pretty up there. I think it's the largest traders organization in the country, if not the world. So it's a pretty big deal. Yeah, there are several lawsuits going on. It all basically comes down to the issue of transparency. And if you believe what NAR and others tell you, the way that we sell real estate, the way we transact real estate here in the United States is the envy of the world. And I actually do believe that, right? Where you have buyer's representation and you have seller's representation. What this all comes down to is the covenant of an MLS organization is really based upon two things, cooperation and compensation. Basically you join this MLS organization and like it breaks down to, if you help me sell your

listing, I'll help you sell. If you help me sell your listing, I'll help you sell yours. Mine. I mean mine. So it's this kind of cooperation between the, and we'll both be paid basically. In the past, I think that a lot of consumers don't understand that how compensation works within a real estate transaction. Who gets the commission, right? In fact, some realtors would say, or have been trained to say, oh, the seller pays all the commission. Well, that's not the case. It's actually, the commission is split four ways. The selling agent gets a part of the commission. The selling broker gets part of the commission. The buyer's broker gets part of the commissioning and the buyer's broker uh buyer's agent gets part of the commission so if you got

six percent for instance um which is it's not six percent it's usually i think nationally it's lower it's really 1.5 1.5 1.5 1.5 right but that money is coming out of the pocket of the of the of the buyer right it's it comes out of the you know it's it's part of that purchase price so everybody wants that to be more transparent they want you know they're not in fact they don't want it to be They don't have to have a compensation that is actually like agreed upon. They just want to say it's all negotiable because what everybody's afraid of right now is the consumers don't view compensation or those commissions as being, as being negotiable.

And these lawsuits are kind of brought from that, that standpoint. If we want to make sure that especially buyers understand that all the commission is negotiable and that's really kind of the root of it all. Well, part of it also is there's this concern that the perception is that the buyer's agent is sort of like a free service for the buyer, which, as you just said, really isn't the case. And so part of this is transparency. And it seems like part of this also, you mentioned MLS organizations, multiple listing organizations. Part of this also is about the splits, because the splits aren't always even. And sometimes in the notes inside an MLS, you'll see that the other side may not get as much. And so that's part of the concern too, right? I mean, you've got public listings in a service, but yet there's all this sort of stuff that maybe the consumer isn't aware of because it's things like agent notes. Yeah. I mean, you know, there's, there could be possibilities. I think what, you know,

the government is also, and others are worried about is that if a seller doesn't want to offer commission that, that the other agents will collude not to show that property, right. Because you know, they're not going to be paid on that. Right. And I'm not sure if they have a lot of, you know, hard evidence on that, you know, to me with Zillow and all the listing information now being on the internet. I mean, if you, if you want to see a house, right. You're going to tell your agent, I want to see this house. If the agent knows that they're not offering a lot of commission on there. Well, I mean, I just can't see it as a scenario where you're going to stop somebody from, if they want to see a house, they're going to go see a house, but there is

that concern again, making everything a little bit more transparent, I think is going to make is a good thing to start happening. Um, for sure. If you don't have to be part of the organization, I mean, that's a shift. But I mean, I think a lot of agents who've been in the business for, you know, a decade or longer, they're used to being part of NAR. They're used to getting the services that they get. They may not want the disruption and the other aspect of maybe it becomes a little more complicated for them to access the MLS versus having everything in one place. So do you think that some of that just sort of like barrier to shifting might be part of why people don't change? they just say, all right, I'll just pay the stupid fee. I think so. I mean, it's, it's inertia, right? They've been doing that the same way. I think, um, and other people, I heard this on

another podcast. They don't realize what, you know, uh, it's a really strong lobbying organization in ARS. I mean, they were really instrumental in getting, let's say during the pandemic of selling real estate, being an essential worker, right? It's a big part of our GDP, right? So without NAR there, you know, you could have a much different outcome of that, right? There's things that, you know, there's things that they do to help the real estate industry. I don't think your average agent on the street really kind of knows or care about until it's taken away. I think there has to be some more education on that from NAR's part or others. There's other things like the word realtor. That is a trademark. You have to be a member of the National Association

realtors to call yourself a realtor, but realtor is like Kleenex or Xerox or Crescent, which is something we use because it's so, you know, it's, it's so out there, right. It's just, everybody knows that, but it's not, it's, it's really a trademark thing. So I can imagine the word play. If you don't, if you're not a realtor and everybody calls you a realtor, you're supposed to say you're not a realtor or the cards that you make, or some of the marketing materials all say realtor on it. I mean, you have to kind of like, I mean, I mean, that's a little bit of a big whoop kind of thing. But still, nonetheless, I think something there. And then the local associations, there might be, how do you file a grievance against another agent that, you know, did

something wrong? Well, if you're not a member of the association that they are, you take them to court. I mean, there's ways that local associations can handle skirmishes in between other agents or brokers or there's rules that have to be followed. There's a code of ethics. I mean, there's a lot of, there's a lot there. I just don't see. And, and, and, you know, I, I know other places, like I think in California, like if you want to, if you're not a member of CAR, it'll cost you $175 a year to get the forms, but it's 180 to join the association. Right. So, I mean, it's not as simple, I think, as again, I just don't, I look at all these things and from, I think from people looking outside in, it's like, oh my gosh, things are going to start happening,

but I'm not really worried about the industry. There are other things I'm worried about what these things are bringing up, but not that. As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear.

I'm Deidre Willard. Thanks for listening. We'll see you tomorrow. Thank you.