Motley Fool Hidden Gems Investing - The "New Normal" in Silicon Valley

Episode Date: May 2, 2023

As loans get more expensive, what are the ripple effects for start-up companies in the tech industry? (00:21) Bill Mann discusses: - Uber's 1st-quarter results and CEO Dara Khosrowshahi's declaration of profitability in 2023 - Pfizer's results beating expectations despite demand for its Covid vaccine is falling - Why he's more interested in the Federal Reserve on Wednesday than the jobs report on Friday (10:49) Alison Southwick and Robert Brokamp continue their conversation with Bill Mann about how the "new normal" is affecting the tech industry in Silicon Valley. Investments discussed: UBER, PFE, MRK, AAPL Host: Chris Hill Guests: Bill Mann, Alison Southwick, Robert Brokamp Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Great news. The federal EV rebate is back. Eligible customers get up to $5,000 with the federal EVAP rebate on select 2027 Volt and 2026 Equinox EV models. Visit your local Chevrolet dealer today for more details. Uber shares are revving up and we're taking a closer look at Silicon Valley. Motley Fool Money starts now. Chris Hill. I'm Chris Hill. Joining me in studio today, Motley Fool Senior Analyst Bill Mann. Thanks for being here! Bill Mann. Hey, Chris! How are you? I'm doing all right. Let's talk a little Uber, shall we? First quarter revenue, 29% higher than a year ago. CEO Dara Khashoggi says that Uber is going to be gap profitable

by the end of the year. I think investors believe him, because that plus the results has shares of Uber up 8%. He has set financial targets for this business in the past, and they have met them either on time or early. It's going to be pretty interesting to see if they deliver on this one. Yeah. Obviously, this was a better quarter for them than they had last year. It is still a company that has negative EBITDA, and I know that acronyms are really great radio, that is, earnings before interest taxes, depreciation, and amortization. It's still negative. And so, this is a company that is showing some promise as a platform to deliver people and goods and services. They talked a lot about IT efficiencies. I still wonder, on a very base level,

how all that is worth, at this moment, $71 billion. That was going to be my next question. This is a business that is stronger in pretty much every way than it was five years ago. Undoubtedly true. And yet, the size of it. Worth remembering, when Uber went public, they were coming public at such a size. That was part of the conversation when Uber first went public. It was just like, wait a minute, how big is this company going to be on day one of being public? And so, where do you think the conversation goes from here? Because obviously, he's put out there, this is the financial target we're

trying to hit by the end of the year. If they hit that, I think we're left with the same question. Is this company still worth $70-plus billion? Yeah. And obviously, we don't know the answer, because you're talking about a fact that has yet to happen, or at least an eventuality that has yet to happen. But obviously, it was a strong start for them. And they say they have a global scale, and they have a significant data advantage over most of all of their competitors, but it still feels like a mature business to me. And when you talk about a platform, they're delivering people to places. They're delivering food to people. They have a couple of different divisions, all of whom feel like Lord of the Flies

type industries. So, maybe you can roll up four or five bad businesses and turn them into a good business, that's what the stock market is telling you is going to happen. I've never looked at Uber and have understood exactly why people were so excited for it as a business. I mean, I understand exactly, from a service perspective, why you might like Uber. But as a business, not $71 billion. Well, it's a great point, because I do think that is baked into the stock price. And it's the thing that really doesn't get talked about. The financial metrics of Uber aside, this is a business that people who have used it and had good experiences with it, and I think most people who have used it have had good experiences with it, they want it to exist.

There's a wish fulfillment aspect to Uber. As much as I love Starbucks, if in a blink of an eye, Starbucks went away, I'm going to get coffee somewhere else. Whereas, Uber is one of those businesses that, if it went away, there are some people who would light their hair on fire. What are you going to do, take a taxi? The nerve! No, I think that's exactly right. We've always had a joke slash non-joke about companies that become verbs. And Uber is near the top of that list. Even if you're in a Lyft, even if you are in some other version of ride-sharing, people call it Uber. They call it Ubering. So, I think that there is obviously a huge amount of brand equity that they have.

and it is all potential. But I just don't see how that potential for what are not great businesses, although they're very big, equal $71 billion. Let's move on to Pfizer. First quarter results were better than expected, despite the fact that demand for Pfizer's COVID vaccine is lower for all of the obvious reasons. Along the same lines, and I realize we're talking about two completely different businesses, and Pfizer is much more mature and established than Uber. Part of me is surprised that Pfizer is a $220 billion company. And I know I shouldn't be, because it's been around for so long. And if you met Americans and our love of prescription drugs. Well, there's that as well. What do you see when you look at Pfizer as an investor? Because I see

an established business that I'm not particularly compelled to buy shares of. Yeah, the pharmaceutical industry is very interesting because a lot of the biggest pharma companies, and I think that by almost any measure you would put Pfizer at or near the top of that list, have gotten away from research and development a little bit. They allowing the single-molecule companies, the small biotech companies, to do a lot of that research for them. And then, when they see promise, they're just spending money to go in and buy it. So, in the case of Pfizer, obviously, it's odd, actually. It just occurred to me that Uber's revenues are up 29% and Pfizer's are down 29%. So, Pfizer, maybe we

we found your revenues. That's not how that works. But whatever. The balance is good. And so, obviously, most of that drop has come because we are out of the worst of, or maybe from Pfizer's perspective, the best of the pandemic. So, when I look at these companies, I think you have to view them as being portfolios of big drugs. And so, they have ones that are at early stage. They have ones that are just sort of cash flow dynamics moving forward. They're not putting a penny into them anymore. They're not even necessarily marketing them anymore. So, if I were to own drug companies, I think it would probably be a Pfizer or a Merck almost over any other one, because they do have economies of scale,

and they do have the capacity to go and outbid almost anyone for those promising and up-and-coming drugs. Do you look at Pfizer in terms of portfolio allocation as being one of those businesses, not unlike a Johnson & Johnson, that is ballast? Does it check the box for you for, hey, part of my reason for buying shares of a company like Pfizer is, it's not going to light the world on fire, but it does pay a dividend. It is going to be steady through good times and bad. That's how I would view it. I would take it a step farther. This may be unorthodox, but if you are viewing your portfolio as an asset allocation exercise, a company like Merck or Pfizer could actually play the role of all of

your pharmaceutical allocation. And pharmaceuticals are a huge business in this country. They actually make up a percentage of GDP that is well above the integer level. So, it is a massive business in this country. But the way that they are going about now, you could almost view a Pfizer or a Merck as being a mutual fund of pharmaceuticals. Real quick, I want to spot you up with three things that are happening between now and the end of the week. We've got the Fed meeting Wednesday afternoon, Apple reports after the closing bell on Thursday, and Friday morning, we're going to get the jobs report for April. Which of those three interests you the most as an investor?

So, the answer has to be the Fed number, although, honestly, I'm not quite sure why. And I also think it's interesting that the Fed is putting out their number two days before the jobs report comes out. Now, when it comes to data, I know they have the good stuff. I know they are not dependent upon the same data that we are eventually getting. But it is a little bit interesting to me, that timing, if for nothing else, in the fact that you can see today, the market is down pretty substantially, and nothing bad has happened. People are just worried about whatever the Fed is going to say. In fact, I think they know what

the Fed is going to say. We could conceivably find ourselves pretty whipsawed between today and Friday when the jobs number comes out. Bill Mann, always great talking to you. Thanks for being here. Hey, thanks, Chris. As loans get more expensive, what are the ripple effects for startup companies in the tech industry? Bill Mann continues his conversation with Alison Southwick and Robert Brokamp about new normals after the pandemic with a focus on Silicon Valley. All right. In our third and final episode of The New Normal, we have Bill Mann back. Today, we're going to talk about the new normal in startup land. There was probably a point

in time where I could have put my hair up into a high ponytail, waltzed into Silicon Valley with nothing but an investor deck about Uber for literally any noun, and walked out with seed. Uber for clowns. I'm in. You want to know my idea? Yeah, I want to know your idea! I wanted Uber, but you only get picked up in fire trucks. It's going to be called Foober. You're in, right? Absolutely! Take my money, please! Bro, did you have an Uber for something idea? No, but now I'll think about it. My idea was Uber for laundry, but someone else also came up with it.

The other thing that I thought would be great is with autonomous vehicles. An autonomous vehicle that would drive your dogs around. Dogs love car rides. Or your kid can't fall asleep, so someone pulls up, you put the kid in, come back in 30 minutes, please, when the kid's asleep. There you go. A billion dollars. In Old Town, it would work. This is the kind of town where people would absolutely, absolutely pay for that for their dog. 100%. Ron's idea is to start a paw reading business where you can read paw reading.

But it's like, instead of palm reading, it's paw reading. Like, I think that could actually do well here in our town. Yeah. You like mead. Next one. You also like mead. You're a very good boy. You're a very good boy.

You're such a good boy. Yes, you are. All right. All right. Those are ideas that we could have at one point in time, just headed over to Silicon Valley, get some investors, and they would just throw money. This segment brought to you by Fuber. Fuber. So, Uber for clowns. We could have got money for it at one point in time.

But now, according to The New York Times roughly a week ago, they wrote about how faking it is out and having a legitimately viable startup is the new normal in Silicon Valley. You might be thinking, Elizabeth Holmes and that WeWork guy are to blame, but the article actually points to at least a half-dozen other startup founders who have recently been found guilty of fraud and lying about the state of their business. So, Bill, what do you think? Is stuff like a strong balance sheet, having a viable business plan, is that the new normal for getting funding? You remember that old line from St. Augustine, Lord, make me pure, but not yet? Not yet.

That's Silicon Valley. That's venture capital. In fact, as a counterexample, the answer, to your question is, yes, but. But as a counterexample, ChatGPT, which really can't do much really well, has a $30 billion valuation on it. And it at least is out there in the world. You have artificial intelligence ideas right now, and you can get checks for a couple million dollars to go try and approach and even get at something that may at some point be a deck. So, there is wild money out there still. Obviously, the rise in interest rates and particularly bank funding rates has hurt venture capital, or at least gotten it just to say Maybe Fubar isn't as great of an idea if you have neither the technology nor the fire trucks.

I actually am on the other side of that. I think that probably we will go through a period of time in which there's a bit of purity, but the next big idea is coming. it may be AI now, but I don't see a place that is as financially competitive as the venture capital industry as suddenly saying, we need full business plans and we need profitability on the table before we invest with you. I'm rereading Thinking Fast and Slow by Daniel Kahneman. He talks a lot about how, basically, we make snap decisions based on all kinds of things that we don't recognize. Some of it is charisma and confidence and

some of it is just the size of a font or something like that. It's clear that a lot of investors and people in Silicon Valley, but even just regular investors, and people in the media, frankly, sometimes some of us here at The Motley Fool, we're wowed by flashy people with flashy presentations. It'll be interesting to see if people decide not to do that. But frankly, I think we're hardwired to fall for our confidence and charisma, so I don't think it's going to be changed. I think it's always going to be that way. Yeah, go back and watch the monorail episode from The Simpsons. It's not new. Monorail! Monorail! Monorail! Written by Conan O'Brien.

Oh, did he write that one? He wrote that episode, yeah. Right. And the monorail episode is based on The Music Man. So, yeah, there's nothing new under the sun. I guess there is something with these new normals where it's like, well, how long does a new normal last? A new normal could actually only last a few months, a year, not really that long. And ultimately, we're going to revert back to our old habits of believing the hype and getting excited about ChatGPT and just throwing money at FUBAR? Not FUBAR. No, no, no. Those people have a really strong copyright. You've already got a naming problem, so we're going to have to workshop that.

Going back to Pa reading. Well, I think what's really important to point out is that people are, in fact, going to jail, including Elizabeth Holmes, for having gone beyond promising something to moving on into the realm of fraud. And what it should tell you is that there's no such bright line as fraud versus fanciful, I'm planning on doing this. But the fraud tends to come up when it seems like what they're promising is impossible. And in the case of Elizabeth Holmes, the thing that they were promising and actually putting out into the market was actually dangerous. And so, I don't know that the law really wants to be in the role of legislating or determining what is a hopeful statement and what is actual fraud.

So, until the period of time in which we all turn our back on hopeful statements, fraud's going to be a part of our existence for as long as that's not the case. Who doesn't love a hopeful statement? It's just human nature. Yeah. You want to ride in a fire truck? You say that to all the boys. All right. Before we go, we cannot help but share our own irresponsible predictions for the new normal. Bill, what is the new normal that you're tracking? I think that there are certain cities that have really, really enjoyed having a lack

of international tourism during the pandemic. I predict that cities like Barcelona and Venice are going to limit the number of people who are able to come in during any period of time. Like, you'll have to get tickets? Like, you'll have to get FastPasses? You'll have to get a Barcelona FastPass. You're going to see the Sagrada Familia. You're going to have to wake up at 7 in the morning to book your FastPass? Yeah.

Was that not fun enough? Can I get back to the... No, that's fine. No, it's good. I want to know more about it. Go on. I want to hear it explained why. So, Barcelona, for example, had, on average, 20 million tourists per year coming and visiting.

And it's like that old thing where it's impossible to observe something without changing it. There are cities in Europe right now that are completely given over to Airbnbs at this point. And I think that there is a logical limit to the amount of people who can come visit. But I also think that the local residents enjoyed the peace and quiet, and they're the ones who get to vote. So, I think this is coming. That's my responsibility. So, if it's going to be hard to visit places like Venice, Barcelona, the big names, Bill,

you're a big world traveler. Where should our listeners go? You should go to Montenegro. Okay. Yeah. You want to say why we should go to Montenegro? No, no, no. Just that's it.

Well, they've got good ham. No, so... Sold. There are a couple of towns on the coast of Montenegro. One's called Kotor, one's called Tivat. They're absolutely spectacularly beautiful, and there are fewer tourists there than in Croatia. And Croatia's beautiful, too. Yeah. Alright, Bro, how about you? What's your irresponsible, or maybe not, new normal prediction? Well, I'm going to say that 10 to 20 years from now, people will work longer and

retire later, but not necessarily work full-time all the time. Nowadays, the average retirement age is between 62 and 65, depending on your source and other factors. Women tend to retire sooner than men. But we can't retire in our early 60s if there's a strong possibility that at some point we're going to live to our 90s and even 100. Yes, life expectancy did go down over the last few years due to COVID, but most experts say that that's just a blip and it's going to continue. Financial advisor Rick Edelman of Edelman Financial Engines has been talking a lot about this for years. On a podcast over the weekend, he said that there's a good chance that if you're alive in 2030, you're going to make

it to 100 and maybe 120 to 150. Most people have not saved enough money to be able to be retired for that long. Geez, those aren't the good years! Noted medical expert, Rick Edelman. Yes, exactly. He's done his research. He's got the internet. Come on! He went to WebMD a few times. My joints are already angry enough at me. I don't need another extra 50 years of this. But here's the deal. Who else do we need to apologize to? We're not done yet. We'll save it for the end. What I think will happen, and what I hope has happened, actually, is that people will

work full-time up to a point in their lives and then work part-time from then on. It might be because they have to give caregiving responsibilities, taking care of kids or parents or spouses, but also they just drop out of the workforce, go back to school, and then they begin a whole new career that they're happy to do well into their 70s or 80s. A lot of companies have not caught on to this yet, but that is changing in terms of allowing older workers to have phased retirement, seasonal retirement, but I think that is also coming. You're basically able to work part-time sooner, which means you're retired part-time sooner, and you can enjoy that for decades.

Well, I took the brief seriously, and so my irresponsible new normal prediction is that a Shen Yun performance is going to be happening in your house at all times. You're going to wake up, make a cup of coffee, and a scarf is going to land in your sanka as a dancer floats by. Welcome to your mesmerizing new normal! Very nice! I love the thought of remote work performances. We can combine it! Yeah? You take a Fuber for remote performances. Fuber for Shen Yu. Shen Yu Fuber. Plus paw reading. Fuber. We're going to be rich!

We need to workshop this a little bit. But you're onto something! 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 Chris Hill. Thanks for listening. We'll see you tomorrow.