Motley Fool Hidden Gems Investing - Big Telecoms vs. Deadpool

Episode Date: March 15, 2023

Ryan Reynolds is joining the T-Mobile team, as Verizon and AT&T adjust. (0:21) Tim Beyers discusses: - T-Mobile buys the parent company of Mint Mobile in a cash and stock deal worth $1.3 billion - How (and when) Mint's business could be accretive to T-Mobile - Why the ripple effect from Silicon Valley Bank's situation will hit potential IPOs and what it means for investors (14:05) Our stock version of March Madness continues! Kirsten Guerra and Jason Moser face off to make the case on why their stock is a better buy right now. Companies discussed: TMUS, VZ, T, SIVB, GM, TSLA, OM Host: Chris Hill Guests: Tim Beyers, Kirsten Guerra, Jason Moser Producer: Ricky Mulvey Engineers: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad? I get it. I'm Siyaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today I'm still figuring it out. Somehow things usually get worse before they get better. Apparently, that's how I roll.

So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem. Chris Hill. Breaking news, something good has finally happened for Ryan Reynolds. Motley Fool Money starts now. I'm Chris Hill. Joining me today, Motley Fool Senior Analyst, Tim Byers. Thanks for being here. Tim Byers. Thanks for having me. Fully caffeinated, ready to go. Likewise, we're going to take a slight break from the banks today. Just for today, trust me, there is more bank talk coming later in the week on this show. But I want to talk to you about T-Mobile, because T-Mobile is buying Cayena Corp., a company I'd never heard of before. It is

a cash and stock deal worth $1.3 billion. And Cayena Corp. is probably better known as the parent company of Mint Mobile, the Ryan Reynolds-backed startup telecom. I'm curious what you think of this deal, because the reaction from the market seems to be a positive one on the day that, as you and I are talking, the market's down overall, shares of T-Mobile are up slightly. This seems to be getting a thumbs up. Given the size of Mint Mobile, given the size of this deal, I'm assuming regulators are going to give this a thumbs up as well. I would guess so. And how can you not like it? You know, T-Mobile gets Deadpool. Right. It's Ryan Reynolds. Who doesn't like Ryan Reynolds?

I mean, that is the thing, right? And he has had, verifiably, at least recently, a magic touch. I mean, if you haven't watched Welcome to Wrexham, I strongly suggest you do. It's an incredible story and documentary series on FX about the National League Football Club in Wales called Wrexham and the story of Ryan Reynolds and Rob McElhaney coming in and owning this club and trying to get it promoted back into the football league. But yes, I mean, Mint Mobile is a, I guess you could call it a Ryan Reynolds side production. And the deal, Chris, the terms look somewhat interesting. So, 39% cash, 61% stock. So, there's probably a little bit of dilution here. It's hard to know exactly how much, but about $526 million in cash, and that is at a maximum.

So, in the press release, it does say, and I like that they use this word, T-Mobile will pay up to a maximum of $1.35 billion in a combination of 39% cash, 61% stock to acquire Kyena. And the actual price will be based on performance metrics and things like that. So, it probably isn't going to be exactly $1.5 billion. But T-Mobile does have a fair amount of cash. They're not a poorly capitalized company. As of the latest data I've got, this is going through the latest fiscal year, $4.5 billion in cash. Now, they do have quite a lot of debt. So, it's not like they have $4.5 billion just in cash laying around. That is definitely not true. But they can easily afford this, Chris, and it doesn't seem like the dilution will be too bad. The question is,

what part of the market is T-Mobile going after here? And I think the part of the market they're going after is the lower end of the market, people who are very price conscious but still want some 5G. They may not be sitting on the latest, greatest iPhone, but they do want a highly affordable plan, and they want to get fairly fast access. That combination is something that Mint Mobile theoretically can provide. One of the things Mike Seifert, the CEO of T-Mobile, talked about, which I found interesting, which is basically the marketing that Mint Mobile has used over the last few years, and how part of this deal is they are looking to apply that type of marketing across T-Mobile. That seems like a little bit of an X-factor

to the upside, I would think, if you're a T-Mobile shareholder. The idea that the marketing becomes better, that potentially Reynolds himself gets involved in this, I don't know. There were some people scratching their heads, because part of Mint Mobile's marketing has been, hey, we're not one of those big telecoms. And now, look, T-Mobile is smaller than AT&T and Verizon, but they're a hell of a lot bigger than Mint Mobile. Right. And it does seem to fit the brand. I mean, I don't really like this, because it sounds way too much like 7-Up back in the 1980s. T-Mobile is the, I'm using my fingers for air quotes here, listeners.

They are the un-carrier. That sounds way too much like the un-Cola, Chris, but like, okay, whatever. I'll give them that. But from a brand perspective, that does sound very much in the rentals genre of things. But here's the thing that's interesting to me, Chris. When you market that way and it's a bit more organic and a bit more fun, the interesting thing about that is it can be cheaper. It can be cheaper if you are making YouTube videos that are silly, that get people talking,

that go viral, and your dollar for marketing goes a little further. And I think Mint has done that really well, in no small part, because of the fame of Ryan Reynolds. But in terms of how this works from a business perspective, T-Mobile did say in the press release that the transaction is, they call, they say specifically the transaction is expected to be slightly accretive to both core adjusted EBITDA, decide for yourself what that means, but also free cash flow. So, accretive to free cash flow. In other words, Kyena is making money because of Mint Mobile. It has a wholesale business. It has another business attached to it. So, there's something to the economics of Kyena as a business that is going to add free cash flow, presumably,

to T-Mobile. And they say there's some long-term economic value that they are going to capture here. But they are going to capture it pretty quickly, that this is going to become available to them fairly quickly. I think that is another reason why you're seeing the shares respond the way they are. I said at the top, we weren't going to talk about banking, but I'm going to invoke all of the banking stories that have been going on in this regard. So much of the oxygen in the financial media right now is being sucked up by SVB. Today, it's Credit Suisse, all of the ripple effects, that sort of thing. And it should. I'm not saying that's inappropriate. what I am saying is, the rest of the business world still goes on. And I'm wondering, in your

mind, what is this story that is flying under the radar right now that investors might want to pay attention to? Yeah, it's really interesting. I mean, the banking stories are exhausting, aren't they? And I mean, it's fair. We could say that. It is exhausted. Oh, yeah. I'm not disagreeing with that. Yeah. And under the radar, I think we are forgetting that banks play an important role in the economy. And they do have, at their best, they have a lubricating effect for markets by providing capital. And Silicon Valley Bank was especially good at this in the Silicon Valley area, and particularly in the startup tech market. The startup ecosystem benefited massively, massively from Silicon Valley Bank. And I think

we're forgetting in the Silicon Valley Bank narrative and the notion that, hey, they took too much risk, they were doing too much of that and this and the other thing, that the thing that it did was sort of mismatch long-term assets and short-term assets. That's what they really did. It really didn't have anything to do, in my estimation, Chris, with the very important function that Silicon Valley Bank had of enabling startups to get capital and to do business functions seamlessly inside the Silicon Valley area and outside of it, such that it really was one of the vehicles that was helping feed the IPO pipeline. And I came into 2023, Chris, thinking that this would be the year that the IPO market would start to unfreeze at least a

little bit. And now I think that's been delayed. I think we have underestimated how much of a role Silicon Valley Bank and banking generally feeds into enabling an inventory of startups that become bigger companies that come to the public market and give us as public market investors inventory to at least review and consider. And that is sad to me. I'm less angry about Silicon Valley Bank, and I'm more sad because Silicon Valley Bank has a history. There's a great story on LinkedIn that I saw, and I posted it in one of our private market channels, where an entrepreneur said, hey, you know, I had this business and it was failing. And I was basically on my last few withdrawals of dollars in Silicon Valley Bank. And I went to my banker and said, you know what?

This business has failed, but I've got another idea. I think it's pretty good. Are you willing to bet on me? And this entrepreneur gave a presentation. They bet on him again. It became a much bigger business, sold for hundreds of millions of dollars, and became a success story. And that is one of the functions of a bank that knows its role, takes on some risk that is appropriate, but helps basically grease the skids of business in an area where it has expertise. And I'm going to miss that with Silicon Valley Bank. Well, it does seem like this is a category that kind of gets added to potential narratives in the second half of the year.

If you think about how we came into this year, and you're absolutely right, one of the narratives coming into 2023 was, hey, things are going to lighten up. We're going to see some IPOs here in pretty short order. but also part of the you know one of the big narratives had to do with the retail industry and inventory management and and you know there were a couple of major pockets of the market where even though we're talking about different industries the punch line to the narrative was boy this is setting up nicely for the second half of 2023 and i think as you indicated we could be seeing a delay here, and rightfully so, understandably so. But it means, wow, the second half of

2023 could just be a role, just like, we won't know where to turn, because potentially, we've got some exciting companies going public, we've got inventory levels at a much more manageable level. You know, a lot of good things could be happening in the second half this year. Yeah, I would say that's right. I would also say you're going to have a little more conservatism injected into the ecosystem, particularly the tech ecosystem, which I follow so closely. I think that is necessary and interesting. I'll take the other side of the argument here to highlight your point here, Chris. I don't think it's a bad thing that good companies that I want to see ultimately come public are forced to be more disciplined

before they come public. So, I'm thinking particular companies like Stripe and Databricks, which are two that we've kind of had our eyes on. When are they going to come public? Maybe it's the second half of the year. But if it moves into 2024, I'm okay with that, Chris. There is some discipline that does need to be injected into the tech market. But what I don't want to see is a freeze out of good startup ideas. And I think the thing that we're missing about the Silicon Valley bank story is that some of that is already happening because it played such an important role in the startup ecosystem. Tim Beyers, always great talking to you. Thanks for being here. Thanks, Chris. Our investing version of March Madness continues with another

quarterfinal matchup. Kirsten Guerra makes the case for an established automaker as she goes up against Jason Moser and his pitch for a small-cap medical tech company. We continue our quarterfinal matchups for Stock March Madness, the better by debates to decide who is the Motley Fool World Champion of Stocks. Kirsten Guerra versus Jason Moser. We flipped a coin. Kirsten, you're up first. Six minutes is yours. Thanks, Ricky. The stock I've got for you today is GM, that is, General Motors. The immediate reaction for a lot of people is probably not a positive one. Automakers are often not considered the best stocks. It's a cyclic industry, weak margins, it's manufacturing. But any company can be a worthwhile buy with

the right opportunity and at the right price. Today, GM is priced as if it will just barely scrape the bottom of the management's margin goals and grow revenue at 0% per year over the next decade. And so, based on how the market is pricing GM, clearly investors don't think highly of the company. And that's fair. GM has underperformed the market for the last year, five years, and 10 years. And yes, that is including dividends. But again, right price, right opportunity. So, let's talk about what that opportunity is ahead of GM. I think at this point, whether you're on board or not, vehicles seem to be going electric. Every automaker ad in the Super Bowl was specifically about that company's electric offerings.

GM has pledged that by 2035, all of their light-duty vehicles it produces will be fully battery electric. Again, all automakers are talking electric right now, but I haven't seen any other OEM that's so devoted to bringing to market EVs spanning so many segments. Management is pushing to produce EVs that cover 70% of segment volume by 2025. That just means that if you go into any GM dealership, they want you to see electric options in full-size trucks, mid-size trucks, mid-size sedans, SUVs, crossovers, luxury sedans, just everything. That's interesting to me. It means that by being early to market in so many spaces, GM potentially has the capability here to earn market share.

And GM market share has hovered historically around 16% or so. It's vacillated a little bit, but it's right around that same area. And that's another reason, by the way, that automaker stocks are often passed over. That auto market is very saturated. There's a good bit of brand loyalty. It's not a very dynamic space that's easy to steal market share in. But as the whole industry slowly shifts to a new electric paradigm, I think GM has a real chance to grow market share by going all-in as quickly as possible.

Quick side note, I can hear Tesla fans scoffing at me calling GM early to market, but when only 5% of vehicles sold in 2022 were EVs, I think, yes, it's still early to market. No shade here to Tesla, who certainly created this market to begin with, but I do think this is an opportunity for GM. Then another byproduct of this industry shift to EVs is margins. I mentioned that automakers notoriously have pretty weak margins, but the shift to EVs, and especially EVs outfitted with more and more software, means that margins should improve. GM's EBIT adjusted margins have historically set around 8% to 10%. Through 2025, GM aims to bring its EV margins in line with those existing ICE margins. Modifying manufacturing facilities for

EVs means a lot of upfront costs, so actually just maintaining those 8% to 10% margins over the next few years is impressive in itself. But then, by 2030, GM believes it can deliver 12% to 14% EBIT adjusted margins, and that's 4% on average margin improvement. While that might not seem like a lot, a four-percentage-point margin improvement for a company that regularly brings in around $130 billion and up in annual revenue can substantially change its value. If nothing were changing for GM or for the auto industry overall, I would say that investors are right here, that the pricing is right for GM today as it stands. But that ignores, I think, the catalyst of potential market share gain and improved margins through adopting that

EV architecture and increased software components in vehicles going forward. Of course, I haven't even touched on GM's autonomous ride-hailing network, Cruise, which today is one of the top contenders alongside Alphabet's Waymo. I think that's because, to me, this is a valuation story even before considering the possibility of that Cruise future. That would just be, in my mind, kind of a potentially very large cherry on top of an already well-positioned business. Kirsten Guerra with an electric car maker that is not Tesla. Appreciate the pitch. Up next, it's Jason Moser. Thanks. Great job, Kirsten. That was terrific. I'm talking about Outset Medical today. The ticker is OM. Outset is a medical technology

company. They're focused on reducing the costs and the complexity of dialysis. I'm sure a lot of people have heard that word. Dialysis is meant to remove waste products and whatnot from the blood when the kidneys stop working properly. Historically, it's been a very arduous and expensive process. It asks a lot from patients and having to go to locations or having expensive and heavy machinery brought to their location. Outset's doing something a little bit differently. They have what's called the Tableau Dialysis Console, which is breaking down these barriers, making dialysis more accessible, more affordable, and even more effective. Ultimately, this plays into a long-term trend in regard to hemodialysis. I always like to find

either a long-term trend or a short-term catalyst. In this case, we do have a long-term trend. Unfortunately, hemodialysis is something that folks are going to have to deal with for the foreseeable future. That is something, when we talk about healthcare today, we talk a lot about connected healthcare as well, and being able to ultimately get that healthcare wherever and whenever we may be. The neat thing about this Tableau dialysis console is that it was the first hemodialysis system on the market to gain FDA clearance for two-way wireless data transmission. So, you could be getting your dialysis treatment from one place and sending that data off to another. So, it really is a trailblazer from that perspective. Ultimately, this company benefits from

that razor and blade business model that we like so much, where it realizes revenue not only from the sale of the Tableau consoles, but also the higher margin recurring consumables and services that make the whole system work. That revenue breaks down into main categories and product revenue, which is ultimately the sale of the Tableau consoles and the single-use cartridges that are required for their operation, that represents about 80% of the business. And then the other 20% is services revenue in maintenance, repair, training services, and whatnot in regard to Tableau and the technology that comes with it. When we talk about market opportunities, certainly Tableau, certainly Outset is pursuing a large market opportunity. They see their total

addressable market in the acute space, and that's treatment in clinics or hospitals, as around $2.5 billion today. They see the at-home market as a $9 billion-plus market opportunity. And that really is, I think, the big differentiator here. It's the at-home market that traditionally just wasn't available before now. But now, folks looking for this treatment are able to actually get this treatment in their home much more easily, far less cost. So, it makes a lot of sense there. And if you think about some of the numbers, today, only 2% of all dialysis patients in the U.S. today are on home hemodialysis, yet 30% of the 570,000 chronic dialysis patients are eligible for that home treatment. So, that ultimately means there

is a tremendous untapped opportunity for Outset Medical in the coming years as more providers are looking to make their dialysis treatments more effective. Now, this, as with any investment, does not come without risk. And I will say that Outset Medical is probably higher up on the risk scale than most. They are a company still working toward profitability that bears repeating. They are not profitable yet, but they are making progress there. In my mind, it is a matter of when, not if they reach profitability. They are guiding for revenue growth of 26% at the midpoint for this year, 2023, with gross margin clocking at around 20%. And for context, they see the long-term target there, and that gross margin number is around 50%. So, again, plenty of opportunity

there as this business continues to grow and scale. Another thing, back in June, they did announce they were putting a hold in June of 2022. They did announce they were putting a hold on the Tableau shipments for home use. The market punished the stock. I'm sure many remember it. The stock was down 34% in just one day on that news. This hold was related to pending regulatory review of enhancements that were made to the Tableau system since its original clearance for home use in the spring of 2020. In simplest terms, the FDA simply wanted more time to review the data regarding these enhancements to the system before greenlighting it for continued home use. That hold was very short-lived back into the market. It turned out to be an absolute nothing. And there

are no concerns with the system and its FDA clearance. I think in regard to the risks for the business, clearly given its lack of profitability today, we can expect to see volatility in the share price. That said, I think it's also very interesting to see that it's holding up fairly well here in this difficult market. In one final note, I'm sure folks out there probably have a question given the nature of this business. Is there any relationship with Silicon Valley Bank? There was some exposure at one time with a small loan that they took out from Silicon Valley Bank. That loan has been satisfied and paid back. They do not have a credit relationship with Silicon Valley Bank anymore. That is one risk that you can

take off the table. But this does seem to be really a business blazing trails as I mentioned. Listen, Ricky, I wouldn't pitch it if I didn't like it and if I didn't own it myself. I do, in fact, own shares myself. Hand on the heart. I guess now would probably be a really good time to have a loan outstanding to Silicon Valley Bank, or maybe I'm thinking about that the wrong way. I have a feeling regulators would be coming after you to get that money at some point. Fair enough. All right, Jason, Kirsten, thank you for the stock pitches. Tomorrow, it's Bill Mann and Nick Seifel. so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening.

We'll see you tomorrow.