Motley Fool Hidden Gems Investing - S&P 500 to Uber: Get In!

Episode Date: December 5, 2023

Uber’s been separating itself from the field, and its improving financials have investors and the index-makers taking notice. (00:21) Tim Beyers and Dylan Lewis discuss: - Uber joining the S&P 500 and the company’s focus on profitability and owning its market. - How Wells Fargo seemed to announce future layoffs in a strange way. - Spotify cutting 17% of its workforce and whether more layoffs across tech and financials could be coming in 2024. (18:18) Alison Southwick and Robert Brokamp discuss end-of-year planning and what you can do today to prepare for 2024. Companies discussed: UBER, LYFT, WFC, SPOT Host: Dylan Lewis Guests: Tim Beyers, Alison Southwick, Robert Brokamp Engineers: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

Dylan Lewis. The S&P 500 tells Uber, hey you, hop in. Motley Fool Money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool Senior Analyst, Tim Beyers. Tim, thanks for joining me. Are we at calf, half-calf, nap-calf? Where are we at? There's never nap-calf, Dylan. Fully caffeinated, ready to go. Love it! We have one business that is joining the company of the S&P 500, and two companies that are talking about layoffs. We're going to dig into those today. We're going to start with the index update, Tim. Ride-hailing company Uber will be one

of the latest additions to the S&P 500, alongside manufacturer J-BIL and building materials company Builders, FirstSource, they will all join the index later this month, replacing SealedAir, Alaska Air Group, and SolarEdge Technologies. And, Tim, to the extent that indices, I know that there are requirements that go into being a part of an index, but to the extent that indices are intended to reflect economic activity and where importance and value are in the economy, I feel like Uber being in the S&P 500 is a good thing. I think it's overdue. But as you point out, Dylan, there are requirements here. And so, they've been a net unprofitable company for a very long period of time. That's finally starting

to change. They've been generating a fair amount of cash. Now, critics of Uber, and there are plenty of critics inside of The Motley Fool, will tell you that a lot of the positive numbers you're seeing are due in no small part to financial engineering, and they're not wrong. Like, For example, if you were to look at the cash flow statement for Uber, you would see that roughly $2.5 billion of cash from operations, about $2 billion of that is coming from cash deferments through equity issued to employees, what we call stock-based compensation. But I would say this is a massive company and it's doing something that is way more than what it was built to do originally, Dylan, and this is one of the reasons why I'm so behind the idea of Uber being in the S&P 500.

It's not just about moving people anymore, it's also about moving freight, it's about delivering food. I think of Uber in some ways as the ultimate last-mile logistics company. Remember, they do have an app and they do have a subscription. There are people that use that Uber app to not just move themselves, but to order food. Uber occupies a bit more of the dollars that they spend on things that require logistics. Either they've got to go somewhere, they got to get some food, they maybe have to send a package somewhere. There is an extraordinary amount of of movement that Uber helps enable. They've done some really good work to make it more attractive for a driver to commit to Uber. One of the things that's made me a much bigger

cheerleader for Uber since we re-upped it in Rule Breakers, I think we're going on a little more than a year ago, and it's been absolutely just through the roof since that time. So the timing was pretty lucky there. But at the time, what Uber was saying is that, look, we are driving towards scale, we're getting unit economic gains. The fact that we are absorbing more of the dollars that go to last-mile logistics are going to show up in things like cash flow. Our margins are going to improve, and we think we're going to get to a pretty big free cash flow number by 2025. We thought that that made sense, and that's why we re-upped it, and we're starting to see the evidence of it. When I look at that, Dylan, that seems to be

100% at the expense of a company that hasn't thought that broadly, which is their primary competitor in Lyft. Boy, times have been really tough for Lyft. You mentioned, Tim, the profitability piece there. I think something that Uber has successfully been able to do, and that's why we're talking about this here now, is they've been able to become profitable and satisfy the listing requirement for the S&P 500. The returns have been stellar on their way to that. They're up over 100% year-to-date. Very different story at Lyft, as you teed up there. They're struggling to find long-term profitability. How are these two businesses going in two totally different directions?

Well, I think one has recognized that they are a last-mile logistics company, and that's Uber. The other has really gotten stuck as a ride-hailing company. And when you have lots of alternatives for catching a ride, then yeah, you don't get a premium. But if you are a last mile logistics company and you do a good job managing both sides of the marketplace, remember that in many ways, you should think of Uber as a marketplace company. The supply side is the drivers and creating value for the drivers. This is a two-sided marketplace. And then on the demand side, it's people that need something. They either need a ride, or they need a food delivery, or they need to send something, things like that. So being a

very efficient two-sided marketplace is what Uber has been really relentlessly focused on for a while. And so I think the struggle is that Lyft has never really figured that out. They really haven't gotten to the point where they're thinking in that way. And now I would argue it's a little too late because there is another specialty last mile logistics company in DoorDash that's also starting to figure out how they can be very efficient in their own right in terms of how they do delivery for their particular markets better than anybody else. And they've crowded some people out. So, it really feels like this is a market, I'm going to call it here in the U.S., of three, and Lyft is the one that's left out, and Uber and DoorDash are kind of competing to see,

okay, who's going to do last-mile logistics better? Yeah, and I have to look at the S&P 500 inclusion here, Tim, as kind of a coronation of so many of the things that Uber has been working on, and something that, in a lot of ways, stamps legitimacy on everything you're saying in terms of their leadership and also the financial state that the business is currently in. I think it says a lot about how leadership has figured out how to be thoughtful, put dollars to work, generating the highest possible return. You don't just want to get stuck in one way of doing things. You have to think broadly and then allocate capital carefully. there's still a lot of work that Uber needs to do. But I think that Uber,

for the past several years, has thought that their opportunity is much bigger than ride-hailing, and they've put dollars to work to back that up. Again, lots of work still to do. I don't think Uber Eats is anywhere near where they want it to be, but it's getting better. There are people who see Uber as a service that they can use in multiple ways. Once the optionality exists in your mind, I can use Uber for multiple things, and you have an app that allows you to do that easily, and you could subscribe to that and get some discounts on that. Then you have others who say, say like, hey, look, the category killer here is Uber. We should be advertising on that platform. I mean, think about this, Dylan. Let me leave you with this as it relates to Uber.

If you wanted to capture the dollars of a customer who is either ordering out or needed to go somewhere downtown and you wanted to capture their attention, would your marketplace to advertise, enterprise, say, a location-based offer, would it be Uber or would it be Lyft? It would have to be Uber. It would have to be Uber, right? So, there's value in the way they've constructed that marketplace that I just don't think exists with Lyft. All right, Tim, let's maintain that leadership lens, that perspective that you were talking about with Uber as we look at a couple of other stories, both of them focused on layoffs from this week. We are seeing layoffs pop up in banking. At a conference this week,

Wells Fargo CEO Charlie Scharf told investors that the company is expecting large severance expense in the fourth quarter of 2023 because the company is expecting more layoffs in 2024. This to me looks like, in a lot of ways, Tim, a company trying to prepare itself for what looks like still a cloudy macro picture. Well, there's that, for sure. But there's also, I mean, can you imagine what this has done to the morale of the bankers at Wells Fargo? Guess what, guys? Here's your 2023 Christmas gift. In 2024, a certain number of you are going to be laid off. It's going to be a lot. We don't know if it's going to be you, but it might be you. How do you feel about that? It's absolutely brutal timing.

That is staggering. The fact that they were saying that. Do you really have to say this? I can't tell if this CEO is either a genius or a moron. I really don't have an idea here, Dylan, because on the one hand, you are prepping the market by saying, hey, look, there's a lot that's coming and we need you to be prepared for this. And managing expectations is something that a CEO is required to do. At the same time, doing it in this way at a third-party conference where your employees find out and they still don't have any real idea of whether or not they're the ones that are on the chopping block, that is, I can't imagine you're going to see really good performance from a lot of areas of the Wells Fargo business over the next couple of

quarters. How could there be? You have just drained the morale out of this bank by virtue of an almost off-the-cuff statement at a conference here. It feels insane. I can't believe I'm even seeing this. And this also, Tim, comes on the heels of a lot of other job cuts at Wells Fargo in 2023. I believe the firm has cut about 11,000 jobs year to date. This is a workforce that is very sensitive to this, along with many others. I'm trying to make sense of exactly what's going on here. Some of the comments I saw from the CEO said that attrition was lower than expected, and that was something that was driving some of this. Do you expect to see more of that?

Well, apparently, this is something that is a feature, a current feature of Wall Street banks here. I mean, it's not just Wells Fargo, according to the reporting we're seeing at CNBC, that Morgan Stanley has said something similar. But just put that in context. I know I sound, I'm really not trying to make a joke here of this, Dylan, but just, can we for a second, pretend that this isn't a Saturday Night Live skit, but also remember that this sounds like a Saturday Night Live skit. You know what? You're not leaving fast enough. We've tried to tell you that you should be leaving and looking for jobs elsewhere. I don't know what we need to do to get you guys to leave, but you're making us fire you. Can

you please stop we don't want i mean we we don't like it that we have to fire you can't you just leave like this is what that sounds like it seems like a bit of a blame shift tim it's incredible it's incredible like so the fact that these banks are saying hey you know what people won't leave because we pay them a lot of money and so we're left kind of bloated so yeah i guess i guess we got to fire some people. Like whose fault is that? Like, could you blame somebody who's making say like 750 grand a year? Be like, I'm not leaving this job. You're paying me three quarters of a million dollars for, for this. And I'm doing what you told me to do. I'm not leaving. And so they're waiting for a big severance payout. I can't blame people for that. It's just bonkers. It's

completely bizarre and entirely the opposite. This feels very dystopian and weird. The layoffs at Spotify, which I know we're going to talk about, feel heartbreaking, but not like this. This feels worse in so many ways. Let's talk about the Spotify layoffs. The company announced this week that it's laying off 17% of its workforce, or roughly 1,500 jobs. Tim, this is another company that has had to deal with layoffs over the course of the year. I imagine it is an incredibly tough week over at Spotify. It's been kind of a tough year in a lot of ways, despite the company's strong financial performance. What do you make of this announcement from Daniel Ek?

It's heartbreaking. 17% of the workforce. That is never easy. It's never good. and the fact that this is coming at the end of the year, which presumably, I don't understand all of the tax reasons we do this, but this is a repeating pattern. We see this towards the end of the year. Layoffs do come at the end of the year, and I think there are tax reasons for that. But yeah, it's heartbreaking. His letter to employees, which they published in their press

room to Spotify's credit. They did put it out there, the full letter. And I thought it was thoughtful. I thought it was reasonably empathetic, but it's hard. I mean, there's no question. This is difficult. And what Eck said in that letter, Dylan, is that they had not gotten back to the levels of resourcefulness, grittiness, like, you know, being able to do a lot with a little bit of capital, which that was the kind of company they were in the early days. And even as recently as say like 2018, 2019, when they were generating quite a lot more cash from operations at that time. And so I can understand where Eck is coming from here. And so he's made the point that they overhired during the pandemic. They took advantage of cheap capital. Now, they are not nearly

as resourceful as they need to be. Tim, my last question for you as we wrap up today's show is, looking at the update from Spotify, looking at the update from Wells Fargo, is it fair to draw a little bit of a trend line here and say, we may see some companies that are looking hard at their workforce and are making some tough decisions? I hate to say yes, but I think that's probably true, and in part because there's such a drive, particularly in the tech sector, for operational efficiency and a quicker move to profitability for a lot of tech companies. Because of that, one of the first places they look to cut operating cost. There's two levers. You can either grow your revenue and your gross profit at a much faster

rate than your expenses grow, or you can lever down your operating expenses. One of the easiest ways to lever down your operating expenses is to lay people off. I hate to say that. I don't like seeing it. I'll say this, one of the most atrocious and unseemly parts of the investing business for me personally, Dylan, is the way that the stock market and institutions tend to cheer layoffs by bidding up the price of a stock. That's a bit of face-punching behavior. It's just really unseemly and awful. But over the long term, is the effort to make these businesses a little better important? It is, and I think that's what Spotify is doing here. What you expect from these companies, and I think Spotify is going to try to do

this the best they can, is if you've got to lay people off, do it with some empathy for for God's sake, and try to make the transition a little bit easier. Tough day to talk through the news, Tim. I appreciate you doing it with me. Thanks, Dylan. You just found out that your sales team is at risk of missing quota. Don't panic. Just ask Rippling AI. Since it's built on your real-time people and business data, Rippling AI can pull metrics from Rippling and Salesforce into a meeting-ready dashboard showing quota attainment, headcount plan, and monthly revenue to quota by region.

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organization. That's r-i-p-p-l-i-n-g dot a-i slash f-o-o-l. Sign up for exclusive access today, rippling.ai slash fool. Coming up, 2024 is almost upon us. Up next, Alison Southwick and Robert BroCamp, talk through end-of-the-year planning, and how to set yourself up for future financial success now. Last week, you may have heard our mailbag episode, and there was one question we received that we felt deserved an entire episode, and it comes from Gabe. Gabe writes, Howdy, fools! Love the show and the Foolish Perspective. This one's for Allison and Bro. Would you mind talking a bit about how you close out one year and prepare for the next from a financial perspective, tax planning, changes to your portfolio, etc. I'm always worried that I'm

not doing enough to prepare for and strategize about tax season. Thanks in advance for any advice. Appreciate you. Yes, Fools, 2024 is almost here. Here are some suggestions for making the most of 2023 while you still can. It's a pretty long list, so we're going to run through it pretty quickly. All right. Our first category is retirement planning. All right. We're going to break this up into those who are still saving for retirement and those who are retired. For those who are still working, obviously, you want to max out your retirement accounts. If you have a 401k or other employer-sponsored account, generally, you have to do that before the end of the year. Generally, you can't just send a check-in. You have to have the money taken out

of your last paycheck or two of the year. You have to contact your HR department and say, okay, when is the last time I can adjust my contribution rate for 2023? Then once 2024 rolls around, you want to change it so you're not over-contributing. For IRAs, you have until April 15th of next year. But why wait? Because generally, it is better to contribute to your account sooner than later. Also, you can start thinking about saving more in 2024 because the contribution limits for both IRAs and 401ks are going up $500 each. And if you want to hit that higher limit with your very first paycheck of 2024, you should also talk to your HR department to know when you should change your contribution rate.

It's generally probably a good three to four to five days before the end of the year, but talk to your HR or payroll department to find out what's right for you. Now, if you are already retired and at the age of which you have to take out required minimum distributions or RMDs, of course, you have to do that before the end of the year. Now, what if you are required to take that money, but you don't need it, and you are altruistically inclined, then you could do something called a qualified charitable distribution if you are age 70 and a half. And that's basically where you have money taken from your traditional IRA and sent directly to the charity. You don't get a deduction,

but it is not considered a taxable distribution. So it does lower your taxable income. It is a bit of a tax break. Just contact the charity to help you with this because there are some rules about this that you have to follow. And then another consideration for retirees is maybe you took out more money from your traditional retirement accounts than you needed. Many retirees have a distribution automatically sent to them every month. It's possible if you took out more money than you actually need for this year, any money you took out in the last 60 days, you could put it back in. Anyone, actually, who takes money out of a retirement account can get it back into the account within 60 days, and it's like it never happened. The good reason why you would want to

do that is then that money goes back into your account, grows on its tax-deferred merry way, but then it also means that distribution isn't added to your taxable income this year. Then the final point about retirement planning, which is really applicable to everyone, is if you've looked at your income for the year and you decide, you know what, I'm going to be in a lower tax bracket this year than I will be when I'm retired, it might be time to consider doing a Roth conversion. The next category is college. Yeah. Most people are saving for college through a 529 plan. There aren't annual limits or deadlines. There's actually just lifetime limits. For most of them,

they're in the hundreds of thousands of dollars. It depends on your state. There's not a deadline per se, except that most states offer some sort of a tax break on the state income tax return for contributions to a 529. The rules vary from state to state. But if you are in one of those states where you could have a state income tax deduction, then you definitely have to make that before the end of the year. And now, if you have kids in college and you are in the opposite situation, which you are taking money out of the 529, you have to take it out before the end of the year. Generally speaking, qualified withdrawals must be made in the same year that the cost is incurred. And then finally, I will point out that the free application for federal student

aid, otherwise known as the FASHA, is now open. It's generally better to do it sooner rather than later, because in some situations, schools or government entities just have a certain amount of money, and once it has been distributed, there's no more. So, it's definitely better to do it sooner rather than later. But also, do take some time to learn about how the FAFSA has changed this year, and in the future, we may do an episode on that. Ooh, foreshadowing. Let's talk taxes. Yeah. So, the big question for most people is, are you going to be able to itemize or not. Most people don't these days, only maybe 10-15% of people itemize because the

standard deduction is so high. Just as a reminder, although I'm sure you all have this right on the tip of your tongue, the standard deductions for this year are $13,508 for single, $27,700 if you're married. Had a household is in the middle there. If you're 65 or older, you get a slightly bigger standard deduction. Here's the deal. If you're on the cusp of that point of where you might be able to benefit from itemizing, as opposed to just taking the standard deduction, then it might make sense to either move some of those deductible expenses either to this year or push them to next year. So, at least for one of those years, you'll be able to deduct some of them. And one of the most popular ways to take a deduction and to move one

thing one year as to another is through charity. You can only deduct contributions to charities if you itemize. For some people who are, again, on that cusp of being able to itemize, they might want to do two years' worth of contributions to a charity in one year. You might want to have two years' worth this year or wait until January of next year to do it. However, there is one way that you can give to a charity that can benefit your taxes that's available to just about anyone. That is donating appreciated securities, stocks, bonds, mutual mutual funds, anything that is in your regular taxable brokerage account. You can't do this with an IRA or 401k. If you have your regular brokerage account, you have something that

you've made a profit in, has a capital gain, long-term capital gain, you donate that to a charity. Why would you do this? Well, then you don't have to pay the capital gain. For example, let's say you paid $2,500 for a stock that's now worth $5,000. You donate that $5,000 worth of stock to the charity. The charity sells it, but they don't have to worry about the capital gains because they're tax exempt. That got you out of having to pay taxes on that capital gain. Then if you have some cash left over because you donated the stock instead of cash, you can just buy back the security immediately. You don't have to wait 30 days. If you do itemize, you can then also deduct that contribution. A few other tax things. Of course,

you've all heard tax loss harvesting. It's always something to think about toward the end of the year, you sell something at a loss, offsets gains, and then up to $3,000 of ordinary income. You just can't do it with something. If you do it, you can't do it with an investment that you bought within the last 30 days, and then you can't buy it back within 30 days. On the mailbag episode from last week, we actually talked about tax gain harvesting. That is, if you're below a certain adjusted gross income, your capital gains are tax-free. rate. It's a little under $45,000 for singles, a little under $90,000 for married filing jointly this year. If you're under those income levels, your long-term capital gains are tax-free.

It's just that if you sell so much of your capital gains, you might move over that. But only those gains would then be taxable, not the ones leading up to that. This is the deadline for people who are self-employed to make their final estimated tax payment. Even if you're working and you've been underpaying taxes, it's a good idea to make a final estimated payment to avoid penalties. Just think back to last time you did your taxes. Did you owe a big bill? Was your bill so big that you also owed a penalty? Well, now's the time to make that final estimated payment. Then just thinking forward to 2024, in about a month, maybe six weeks, we're also going to start getting in the mail and in our email all our tax documents.

So, simple little strategy, just put a big manila folder by wherever you collect your mail. So, you put all the tax documents as they come in, so they're all in one place. And then have a folder in your email inbox for all the tax documents that get emailed to you, so that when you sit down and do your taxes or meet with your accountant, you have everything you need in one or two places. All right. And let's do a final quick punch list of stuff that didn't fit in the other categories. Yeah. Obviously, if you have a flexible spending account, you should generally use that before the end of the year, depending on your plan. With a medical flexible spending account,

you might be able to roll over around $600 to next year, but not every plan allows that. Do that. I think people underappreciate how much stuff is eligible to be used for a medical flexible spending account. So, fsastore.com is a good source of basically information about that. But nowadays, even Amazon has a section on their website of expenses and things that are eligible for flexible spending. So, you want to drain those accounts. Towards the end of the year is when many mutual funds make their capital gains distributions. It's kind of complicated, but you definitely do not want to buy into a mutual fund in a taxable brokerage account right before they make their capital gains distribution. If you were eyeing a mutual fund

that you're going to buy, you might want to wait until the beginning of the year. This isn't really an end of the year deadline type of thing, but it's something I think everyone should think about. That is, these days, thanks to the Federal Reserve raising interest rates so much since the early 2022, many sources of cash are yielding 4%, 5%. Yet, if you look at the average interest rate at the typical bank, it's less than 1%. Many people are still leaving their cash in these bank accounts, in these checking accounts. One of the best things you can do right now for your money is to look at where your cash is. If you are only earning 1% or 2%, you can do better. The Motley Fool has a website called The Ascent, which can point to higher-yielding savings

accounts, higher-yielding CDs. Also, money market funds are a great option these days. Most of those are also yielding over 5%. You may have noticed that interest rates have been going down over the last several weeks. It actually might be a time to look at maybe a one- or two-year CD to lock in today's interest rates. All right, Bro, do you have anything on your financial to-do list to finish off the year? Well, just think about what my wife and I do towards the end of the year, every year. She's self-employed. So one of the things we do is our final estimated tax payment.

And because she has a solo 401k, it's one of those situations where you actually can send a check to your 401k. So we take a look at our money and say, OK, how much can we afford to put into her 401k? But the other thing we're doing is, you may have heard that Mint is being closed down by Intuit. I've used Mint in the past. I've used what was Personal Capital, which is now known as Empower. I'm not happy with some of the options out there, frankly, because I'm becoming less

comfortable with aggregating all my accounts with one provider. One of the things I'm going to start doing over the next few weeks is looking for a new budgeting system. 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.