Motley Fool Hidden Gems Investing - No Artificial Sweetener for Uber

Episode Date: February 7, 2024

Uber’s first ever year of profitability comes without any caveats, what should investors make of the everything app at all-time highs?  (00:21) Tim Beyers and Dylan Lewis discuss: - Uber at all-time highs and its ride-hailing dominance. - Chipotle’s fantastic quarter, and why the company’s comps prove you can’t bet against big burrito. - Roblox’s return to strong user metrics, and why analysts are talking about the company’s ad business. (17:02) What might dating profiles look like for stocks? Mary Long caught up with Motley Fool Senior Analyst Asit Sharma to figure out which companies would make a good long-term partners for investors. Companies discussed: UBER, CMG, RBLX, DIS, VRTX, MSTR Host: Dylan Lewis Guests: Tim Beyers, Mary Long, Asit Sharma Engineers: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst Tim Byers. Tim, where is the caffeine meter checking in? It's all about survival today, Dylan. It's all about survival. I hope that the rest of your day goes better than the way it started. But I do love that you are fully caffeinated and ready to go. We've got some huge names in the digital economy posting some big-time results. And we're going to stop to smell the roses on a Valentine's Day stock. Tim, we're going to start with Uber, because it is the end of an era at Uber. The company reported its Q4 results and its first-ever full-year profit. Important to note that while

it did post $1.4 billion in net income, a billion of that was the investment income. But, Tim, we had legitimate operating income for a full year from Uber. It's impressive. I have to give credit where it's due. There are some growth investors who saw this early on. We did make this a re-rec and Rule Breakers about, I'm going to say, a little more than a year ago. But part of that was because of work done by others. I'll single out Henry Ellenbogen at Durable Capital, who was early on seeing just how good Uber was tracking. Just a couple of numbers here, Dylan. There was a thesis for Uber that if they could start generating real meaningful gains in gross bookings, no matter what you

say about it, I'm not a big fan of adjusting anything, but management does get paid on what's called adjusted EBITDA. A lot of their incentives are tied to that. For those who don't know what EBITDA is, it's earnings before interest, taxes, depreciation, and amortization. So, think of it as earnings before really everything that matters. And there's a real caveat here. When management tells you how they're going to get paid, you can expect them to focus on doing the things that are going to get them paid. And, Dylan, they are doing the things that get them paid.

Gross bookings were up 22% in the fourth quarter. Adjusted EBITDA was up to $1.3 billion during the quarter. That is up a full $618 million year over year. Not quite a double, but very, very close to that. Their adjusted EBITDA margin as a percentage of gross bookings, in other words, getting leverage off of all of that business that's done on the Uber platform, that rose to 3.4%, which was up from 2.2%. It's not right. Even though Uber has been fairly criticized in the past of being a business that gets a lot of artificial sweetener and benefits from a ton of artificial sweetener, that is less and less true. In fact, I'd say for this fiscal year, Dylan, it really isn't

true anymore. That's not what Uber is anymore. Yeah, Tim, I was going to say, Uber is like the poster child for adjusted results, or has been for so much of its time as a business. you go back to 2016, all the way through to the first quarter of 2023, Uber collectively racked up close to $30 billion in operating losses. So, a lot of what they were trying to get people to focus on were those adjusted numbers. I think even as we dive into this result and start looking at some of the elements that would lead to those adjustments, we're seeing positive signs, specifically looking at things like stock-based compensation. Right. Yeah. When we look at SPC, that is money that's paid out to employees in the

form of stocks. It's a non-cash expense. That's been going down, not up. Uber, early in its life, did fund a lot of its more expensive endeavors by hiring very talented employees and giving them a lot of stock and deferring what would be legitimate expenses they'd have to pay in cash. That is, it's less of an issue now, Dylan. So, when we look at the cash flow statement here, just year over year, in the fourth quarter here, stock-based compensation expense was $469 million. And that would be a lot, it is a lot, but that's down from $482 million. In 2023, full-on, $1.9 billion. So, yeah, that is a lot. And it's up a little bit from $1.8 billion. I'm rounding up here. If we really want to be specific, it's $1.94 billion

vs. $1.79 billion. But overall, what's driving, I can't say this enough here, overall cash from operating activities. Note that I said, yeah, the stock-based compensation for the full year is up, let's say, about $130 million. You know how much overall cash from operations was up during the fiscal year? It was up almost $3 billion, Dylan. You can't say that it's just the artificial sweetener that is coming in and saving Uber. It's just not true. It's becoming a more efficient business. Trips are up. Bookings are up. The core business mobility was up 29% in the fourth quarter here. There are areas of the business that aren't holding up their end of the bargain. Freight was down 17% during the quarter. So, it's not a perfect business,

but the business is getting better, and materially so. It feels like a great time to check in, because we have these updated earnings results and because after the earnings response, stock is at an all-time high. We are looking at Uber at an $140 billion market cap. At this point, main competitor Lyft, a footnote at $5 billion. It's kind of hard to believe, Tim. How are you feeling about the business right now? I'm feeling pretty good about it. I'm not sure that I love the valuation here, Dylan, just because it is so massive. Having said that, this does happen from time to time, where you have a company that has essentially taken a giant foot and stomped their primary

competitor. And that is what's happened here. Uber is sucking the oxygen out of the room. And increasingly, they are taking the lion's share of the dollars spent on last-mile logistics. And as that pool, as that pie grows, what you're really counting on is that there becomes a bigger demand overall for last-mile logistics, delivery in its various forms. And not just ride-sharing for people, delivery of groceries, delivery of other items, flowers, other types of convenience. And ultimately, I do think they've got to figure out freight in order to deliver meaningful multi-bagger returns from here. So, there are questions. The valuation is a little bit rich. But anybody that thinks that buying Lyft here because

it's just a fraction of Uber, I think might be deluded. Similar story of industry dominance with Chipotle and restaurants and Fast Casual after reporting earnings. Shares of CMG at all-time highs. Tim, this looks like one of those businesses where everything is working. Pick something, zoom in on it, and the numbers are going to be looking really strong. Yeah. It's pretty amazing. when we were talking off-air here, comps, same-store sales up 8.4%. The expectation was for a 7.1% increase. Think about that for a second, that the street was actually expecting a 7.1% increase, which is a lot. That is a lot for a company as big as Chipotle

is right now. Instead, they come in with 8.4%, just bananas. That's absolutely insane. Overall, Chipotle opened 121 new restaurants during the quarter, 110 locations include a Chipotle drive-thru. And this is something that I think is really interesting, Dylan, what these results tell me is that more and more of the square footage, including the drive-thru, is delivering more efficiently for Chipotle. And what's fascinating to me, this is a report, kind of more specific industry report on the quarter from an industry trade publication called Restaurant Dive. And the idea here is that

apparently Chipotle says they can get to 1,000 Chipotle, in other words, drive-through versions of their restaurants, and they are at 811 units right now. And that includes conversions of their existing restaurants. So, it seems very likely here that what's driving Chipotle is two things, Dylan. First, better usage of the square footage they have for walk-in customers, but also really generating massive increases in order volume through those Chipotleans. I think this is a business that's really got its mojo right now. I want to put the same question to you that we just discussed in the Uber conversation. Stocks at all-time highs. It sounds like you're saying there are some good growth levers,

especially with the Chipotle lanes and what management has laid out there for the growth plans. Yeah. They're not quite halfway to their overall goal of 7,000 restaurants in North America. I would say there's room to grow here, maybe not at the level that it has been growing. I'll just confess personally here, Dylan, that I have a fairly big position in Chipotle. There was a point about, I'm going to say, three years ago, where for the individual portfolio it was in, it was an IRA, and it had occupied more than 50% of that IRA. So, I sold down half of it, and it is now climbing back towards close to half of that portfolio again. And it's hard for me to see selling it here, because the business is just

getting increasingly better. I would not say that the valuation is cheap here. I need to do a little extra work on it. But, boy, when you see a company that is executing at the unit level the way that Chipotle is, it's time to pay attention, for sure. Tim, I think I speak for everyone when I say I'm jealous of your problems. Alright, we're going to wrap with a look at earnings from Roblox. Shares up 8% following the company's results that had better top-line growth and narrower losses than expected. Beyond some of the top-line numbers, when I look at this business, Tim, I always zoom right in on what we're seeing from the user metrics in particular. That's what makes the

business go, it seems like we're seeing some pretty strong trends with those metrics this quarter. Yeah. The thing to pay attention on for Roblox is bookings. Bookings for the quarter were up 25% year over year to $1.13 billion. I'm sorry, that was for the quarter. And for the year, $3.5 billion. That was up 23%. Bookings forecast continued revenue growth just by by virtue of the way that people get in and engage with Roblox. For example, they'll spend money and buy up additional digital goods, and then that revenue gets recognized over time. The bookings capture the business of the Roblox metaverse, and the revenue is what gets recognized, that things get used in the Roblox universe. You really want to pay attention

to bookings here. But there's also, as you point out here, Dylan, really good activity metrics. Average daily active users now up to 71.5 million. That's up 22% year over year. That's for the quarter. And for the full year, 68.4 million, also up 22% year over year. But here's the really good metric here. I know we're audio here, so you can't see me doing this, But if you want to think about how Roblox hockey sticks, there are two things. You want more daily active users. That's one thing that helps push the hockey stick up and to the right. The other thing is the average bookings per that daily active user.

So, if the number of users grows and the amount they spend grows, you start getting up and to the right. The average bookings per daily active user was $15.75 in the quarter, and that's up 3% year over year. That doesn't sound like a lot, and I get that that does not sound like a lot. But 3% on a vastly growing user base, Dylan, generates a whole lot of momentum. The big mo is really with Roblox right now. There are some interesting things in this company's future that I want to check in on. One of them is advertising, Tim. We're in the early innings here with this. Management has said,

basically, it's not going to get split out, and it's not going to be something we can look at individually until it is material. But it came up 10 times in the company's earnings call, which to me is saying more and more people are starting to think about this and pay attention to it. How are you looking at it and the way it could potentially help this business? Well, I think there is contextual advertising that really works inside of Roblox. We had things like performances, performances inside Roblox, concerts, things like that. It's not a stretch to see the model of product placement that is so common in TV shows. You've seen this, right? you watch your favorite police serial, and they're all using Dell laptops. Who paid for that, Dylan?

We know who paid for that. Product placement inside Roblox is natural. You could see this happening as the number of creative experiences and games multiply inside the Roblox universe. that increases the number of product placement opportunities. You could absolutely see why advertising is an area of discussion for Roblox. The thing that's going to make this better is something that we've yet to see, and I need to go through the call to hear how they're doing more of this. The Roblox experience and the value of the platform multiplies when it's easier to create new experiences inside of Roblox. You take somebody who's a casual user of Roblox, maybe plays a game, and you make that person into a creator. And one of the ways they want

to do that is by automating the creation of experiences with AI. That's something they really care about. So, if we have that, and the platform multiplies, and you get an explosion of creativity inside Roblox, one of the happy byproducts of that can be this really interesting advertising revenue stream that surfaces and delivers at a very high margin level. So, it's an exciting time. There's a lot still to be worked out, but it is an exciting time. To use a tweak on a famous quote, if you build it, they will come and create and advertise, Tim? We hope. We hope.

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Coming up, what would dating profiles look like for stocks? My colleague Mary Long caught up with Motley Fool senior analyst, Asit Sharma, to figure out which companies would make good long-term partners for investors. Asit, Valentine's Day is just around the corner, and we're celebrating on Motley Fool Money with some love-minded episodes over the next few days. To kick that off, I thought we'd play a fun little game, like a business-oriented version of The Bachelor, if you will. I have taken the time to scour through the dating profiles of some eligible companies and want to talk through them with you and see which out of these four contestants might wind up with a final rose from you, an investor. You ready to play?

Mary, I'm so ready to play. I mean, love is in the air. Valentine's Day is coming up, and I'm such a picky Bachelor. Let's get this show on the road. Let's get this started and see who can win over your investment analyst heart. Our first contestant goes by the name of MicroStrategy. On the surface, this is your classic tech bro, an enterprise software company that has a cloud infrastructure business, an analytics segment, and, of course, has its hands in AI. That all might sound nice and shiny enough, but there is a catch.

MicroStrategy seems to be the person at the table who just can't stop talking about crypto. In 2020, the company made an abrupt decision to start hoarding Bitcoin. They've been around since 1989, a legacy software business, so it seems like quite the pivot. How did we get here, Asit? It's a great question. This is one of those partners that you start dating because they look so good, then you get a sense of the personality. How we got here, there was a slow accumulation of cash on MicroStrategy's balance sheet. That's boring, middling enterprise business, but they had a steady accumulation of cash flow over the years. Their CEO, Michael Saylor,

started thinking about this cash that was sitting there. He was also getting a little skeptical of the strength of the U.S. dollar over the long-term. A funny thing happened. This was during the pandemic when all of us were holed up in our houses on Zoom a lot watching crazy stuff on the markets and crypto, among other topics, he started to think, look, there's something here on this long-term store of value story I'm hearing about Bitcoin. The dollar is going to decrease, I think inflation is going to increase. Of course, if we go back to 2020, that was a time of low interest rates. He started subtly talking up in conference calls the fact that that money on the balance sheet was just going to lose its value. He would say, it's going to get inflated away.

Lo and behold, one day in July of 2020, he tells the analysts on the call, hey, we're looking for some alternative investments. Who wants to put money in the bank? We're looking at silver, gold, and Bitcoin. That's how the story started. Apart from this Bitcoin interest, we can make exceptions for the right person. Apart from this massive Bitcoin crypto interest. Is there promise in MicroStrategy's software business? Can you even separate the company at this point from its Bitcoin holdings? Well, I should say like any decent software business that has enterprise customers, sure, there's some promise in it, but it has been a very, very slow growth story. It's stable,

a little bit of a boring business. Those who have followed MicroStrategy and Michael Saylor have watch them put all their available cash into Bitcoin, even take on more money, take on debt to buy more Bitcoin. There's this quasi-investment vehicle for people who want to participate in Bitcoin, but don't want to worry about the complexity of holding the asset. When you look at now this business that's got one shoe in Bitcoin and the other in its core business, core revenue stream, it's still easy to separate them out if you look at the financials, Mary, so you can follow along the operations of the business. But some of this starts to bleed into each other. For example, Michael Saylor has been fond of saying, hey, if you

invest with us, you don't have to worry about the fee you would pay to custody your assets, your crypto assets. But look, they have a lot of expenditure for a small company in custodying the asset themselves, the insurance, the due diligence, the accounting, internal controls and reporting. All that is a cost that actually gets buried in the G&A general and administrative section of their core operations. There are better things out there. I want to say before we move on about this dating candidate, it's also not just like the crypto bro type partner, but the type of partner your friends say, you could do better. If you want to buy an enterprise software business, there are plenty of great ones out there.

you want to hold Bitcoin, now there are spot ETFs that make it really super simple for the investor to get involved. I don't know about this one, Mary. It is not pushing up my romance meter at this point in the game. We've got other contestants that might be more appealing, so let's move on to them. Up next, we've got a date that has stories galore. Disney knows how to tell a good tale, but the company is going through some tough times. Disney spent a lot of money to sit at the cool kids table, aka to join the streaming club. And now, despite having more than 150 million subscribers, Disney Plus and the company's other direct-to-consumer entertainment offerings have yet to generate

a single quarter of positive operating profits. How did the House of Mouse fall so far? I like that you characterize it that way, Mary, because I actually like dating people on the rebound. I find sometimes that's easier to find a partner than going out there and doing the hard work of someone who's already taken. All right, let's talk Disney here. As it relates to your question on streaming content, the first thing Disney did was to misprice its IP in the marketplace. They had these great assets that they had developed over decades. They come into the game to compete against the likes of Netflix and really have what I thought was a great entry point. This was a few years ago when

they started their digital streaming business. From the beginning, they should have priced their subscription services a little higher. This year, they bumped up their subscription prices by about 27% without much pushback from customers. They've also started to have that ad-supported tier that we see Netflix and other companies engaging with. Another thing I think that Disney got wrong was, they took a lot of time to get their cost structure right for new streaming content. This was mostly under the former CEO, Bob Chapek. This is Bob Iger's hand-picked successor. The other thing that Chapek did, which was hard on the streaming business, was he took too much control out of the hands of creatives in how they would manage their budgets, the kinds of ways they

could dream and then put those dreams into production on a cost-effective basis. And I think Bob Iger sort of righted a lot of this, and he's making it into a more efficient business. Yeah. So, let's talk about those characters, Bob Chapek and Bob Iger, because in addition to all this baggage that we've just discussed, it seems like there's another wrinkle in this Disney character, which is that they might have a bit of a helicopter parent. Bob Iger left the company, Disney, then Bob Chapek stepped in, then Bob Iger came back. Is Iger what the company needs right now, or are Disney's current growing pains due to the fact that this is a parent who can't let its child leave the nest? It's so complicated. I have so many

thoughts on this. I am a parent. I have for really teeny, teeny, teeny brief periods been a helicopter parent. But for those out there who have seen their colleagues become helicopter parents. There's nothing more maddening. Perhaps there's some truth in this that Iger is helicoptering a bit. But truthfully, a little bit of this is on him. He misread the capabilities and business acumen of his hand-picked successor. He created some of the problems. Now he's coming in to try to fix it. Maybe we shouldn't say he's 100 percent helicopter parent. He is helicoptering, but I think he sees himself more as the hero in this story. There is a wonderful song by the indie artist M. Ward, who I think many more people should listen to. The song is called

Helicopter. And in this song, the protagonist has a great line after he saves a relationship. He says, helicopter, helicopter, let your long rope down. Let us sway into the sunset. I have done all I can do in this town. And I think that's how Iger sees himself. He's coming to fix his problem. He's not helicoptering down. He's going to fix it. And in 2026, if everything works out Well, the rope will drop, he'll go off into the sunset. A beautiful ending to a beautiful tale. Our next contestant goes by the name of ServiceNow. Also a tech bro, they're an enterprise software company that helps businesses replace manual

processes with digital ones. Basically, the name of the game here is productivity. ServiceNow seeks to sign up some of the largest companies in the world as its clients. Because of that, it faces competition from big names like Oracle and smaller but crafty players like Atlassian. Doing that, going up against that kind of competition, requires some big dollars. But ServiceNow doesn't love to spend on acquisition. So, is this company a big spender? What kind of money is ServiceNow spending on research and development or sales and marketing? When you put them both together, Mary, they are a pretty big part of the company's cost structure.

In the last trailing 12 months, general and administrative expenses have been about 46% of the company's top line, and R&D has comprised about 24% of every dollar of revenue. When you look at those together, they've been actually a little bit equal to gross profit for the last several years. ServiceNow has had anemic profits for such a big company and one that has these great relationships with enterprise customers. in the last couple of years, especially in the last 12 to 18 months, they've hit that magical thing that every big company strives for. They've hit scale. So now you're starting to see

that gross profit is growing in excess of the combination of sales and marketing expenses, G&A, and research and development. So they spend big money, but they're getting a yield out of that. They're spending big money. How do they act when it comes to tipping? Are they generous or are they a bit stingy there? Basically, what's their stock-based compensation system look like, and does that change this earnings picture at all? I mean, they're a handsome tipper, a very handsome tipper. They have a very large percentage of their expenses that are expressed as stock-based compensation, meaning thereby, if you're paying your employees a certain dollar amount, when we say stock-based compensation is high, it means the employees are getting a lot of

stock as well as salary, and that dilutes shareholders. But I think ServiceNow gets a great yield out of that. They compensate a small army of software engineers, and they're technically better than so many companies they compete with. They were able to pivot very quickly into generative AI, had great relationships with Nvidia. The core structure of their platform is very sophisticated. Now they're selling a lot of AI services that have a good return on investment, not just like window dressing AI type stuff, the real core AI businesses that help companies get a little bit more productive. And by the way, use that word earlier, Mary, productive is one of those characteristics that starts to get me flirting.

When I see a company that's productive, I start looking their way. Last but not least in our lineup, we've got a character who's a little bit different than our other contestants, Vertex Pharmaceuticals is a dreamer. The biotech company builds innovative therapies to address and potentially eradicate severe diseases, especially cystic fibrosis. But awesome. Lots of people, lots of companies have big dreams. Vertex stands out from the pack by not just having big dreams, but being pretty stable. They're a stable biotech, and you don't often hear those two words, stable and biotech, go together. there. How has Vertex managed to find stability in an otherwise volatile sector?

Vertex got an early lock on the cystic fibrosis market through a drug called Trikafta. This is a drug that has helped a lot of people around the world deal with their CF, cystic fibrosis. They've done really well at expanding the drug around the world and also getting approvals to market it to younger populations. That's been this core stable revenue stream. someone who has been through several relationships in his life, when you get to that person who has that steady income, they don't have a lot of emotional baggage, but they've got some fun things about them. They're ready to do new things, novel things, travel. You start looking at them as well. I think this is something that Vertex is very good at. Mary, you were talking about this when

we were prepping for the show, that you think they've got some interesting other parts of their business that we should look at. Yeah. The thing with Dreams is, they just keep going, keep expanding. What other therapies is Vertex exploring beyond cystic fibrosis? Sure. They've got a whole host of therapies in their pipeline, and they're all really ambitious. Just briefly, one is called Casgaffy. I hope I pronounced that correctly. It's a gene editing therapy that they have developed alongside their partner, CRISPR Therapeutics. It treats sickle cell disease. Also, something called transfusion-dependent beta thalassemia, which has to do with anemia in the blood.

Both of these have, or this drug in both forms has just received approval from the FDA recently, so they're off to the races with this therapy. They also have something that a lot of people are paying attention to called VX548. This is a drug that's in development. It's a non-opioid pain drug. So the potential, if it works out, is to really replace some of the addictive opioid type medicines, potentially addictive medicines that some patients are reluctant to take when they have pain medication. Finally, they have something called Anaxaplin. This targets APOL1-mediated kidney disease. It's in pivotal clinical testing. Now, they've got a slew of other therapies that we don't have time to discuss, but this just gives you a picture. It's an ambitious

company, which is trying to lean on those stable cash flow streams that it's got from its CF drugs and move into different parts of the market and just get even stronger. Okay. So, Asit, we've gone through a number of contestants, each with some green flags, some red flags. Out of these four lovely options for you, we've got MicroStrategy, Disney, ServiceNow, and Vertex Pharmaceuticals. Which company are you giving your final rose to today? First, I have to say to all four companies, I really think there's something nice about each of them. I don't want anyone to go home heartbroken. They've all got some type of future, but I have to say that my rose goes to ServiceNow. This is a company that is executing on all fronts.

It's just getting bigger at scale and it is relentlessly ambitious. They're the kind of partner that I think always keeps it exciting and is always investing for the future. I like long-term relationships and I think I could be happy with this one for a long time from now. I wish you and ServiceNow a very happy future together and I'm so glad that we got to see the start of this budding romance here on Motley Fool Money. Well, thank you so much, Mary, for being so patient as we worked through these very fine candidates, and now I'm off to my day. As always, people on the program may own stocks mentioned and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely

on what you hear. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.