Motley Fool Hidden Gems Investing - Uber Makes a Profit

Starting point is 00:00:01 Stop wasting your nights on a mattress that doesn't get you. Experience the most comfortable mattress in the world. The Sleep Number Smart Bed. At the touch of a button, you can personalize your comfort. Choose firmer or softer. Adjust cooler to warmer. And right now, save up to $2,500 during our massive Labor Day event. Hurry into your local Sleep Number store today.

Starting point is 00:00:27 Because we have your number. Did you ever think that Uber could make a profit? The CEO has a message for the doubters. You're listening to Motley Fool Money. I'm Ricky Mulvey, joined today by Bill Mann. Bill, good to see you. Hey, Ricky. How are you doing, man? I'm doing pretty well. Thanks for asking. The big news today, the A headline, Uber reported its first ever operating profit. The ride-hailing company made about $400 million in the quarter. That beat analysts' expectations and is up from a $2.6 billion loss in the year prior. CEO Dara Khashrashahi took what I would call a mic drop on the earnings call for hitting that green operating profit, also $1 billion in free cash

Starting point is 00:01:23 flow. Does Uber deserve to give itself a nice little pat on the back? I think because they have crossed the line from being negative and losing money into operating profitability, yes, they have proven to the most negative doubters that Uber is probably a business that can sustain itself without continually going back to the public markets. So, this quarter was a surprise, and obviously, the market is rewarding it as a surprise. I'm not convinced it was as great as all that, though I was someone who, during the COVID period, was mystified that a company in Uber's business was not yet able to to make a profit. But yes, they've done it. It's great. Not 100% sure that this is the

Starting point is 00:02:21 mic drop situation that the CEO is suggesting it is. Yes. The quote from the earnings call from Kasha Shahi is, many observers over the years boldly claimed that we would never make any money, and I understood why they felt that way." Because we didn't. Also, I would say with the earnings call, Bill, man, I think this hit what I'll call the 2023 triple. Big tech company found its way to profitability. Investors seem to be responding more to the revenue guidance. The very first analyst question is about large language models. That's right. We need to hear not so much

Starting point is 00:03:01 about money, but we need to hear about your generative AI program, which is going to revolutionize your and every other business, which means that it will revolutionize no businesses. Look, I don't want to sound like a naysayer, but they did also have almost $500 million in stock-based compensation that does not show up at the top line, and it does not show up in the cash flow statements. Again, it was a great quarter for them. It actually was. It was one that was better than I thought that Uber was capable of. I do think that because so much of their gains came from their investments rather than their operations, you have to be a little bit careful before you take that full victory lap. How about promising profitability in every

Starting point is 00:03:59 quarter moving forward? I'll point out some more highlights. Gross bookings, that's how much customers pay, grew 16% over the year. Revenue came in at $9.2 billion. That missed expectations by a cool $100 million. The chief financial officer is leaving in January, and their freight revenue declined by 30% year over year. Any of those really stand out to you? We don't have to talk about stock-based comp. Bill, we adjust for that. We adjust for that. I don't know that we can adjust for the CFO choosing to leave. Maybe he feels like, at this point, I did it. We've made it into the green. I've got a new adventure in front of me. The freight has been their weak point. It is the part of their business

Starting point is 00:04:43 that has, I would suggest, the least logical linkage with the other components of their business. It is quite a heavily competitive segment. But is that good analysis, Ricky? We'll leave it at the long-term vision, which I would say I might have a similar response to. Uber is trying to be a, quote, operating system for your daily life. It's one app for all kinds of rides, not just car. We've got boats, we've got planes, and delivery services. I know you're less than enthusiastic, so I'm not going to ask you about your enthusiasm, but they seem to be doing better than Lyft. They are doing better than Lyft. I am waiting for Uber piggyback rides, though. That, I think, is the game changer. Forget AI. Someone showing up and giving you

Starting point is 00:05:32 a piggyback ride, that's going to be huge. I don't have a clever response for that, but I would love to see it. Your eyeballs started just shaking involuntarily when I went that direction. Here's something we were unprepared for. All right. Here's the company I really want to talk to you about. It's a small cap and a value investor bill. It is a REIT. It's called Apollo Commercial Real Estate. They reported earnings yesterday. It's sub $2 billion. Here's why I want to talk to you about it. It's a complicated story. It's got about 20% of its book in office buildings, but a lot of those buildings are in Europe with different back-to-office trends. It's got a lot of real estate in New York City, about a quarter of

Starting point is 00:06:11 it. Almost all of its debt is floating rate. The company trades at seven times earnings. They will pay you a 14% dividend to wait. The CEO, Stuart Rothstein, says that this floating rate debt is good because it means more borrowers are paying more to service their debt and shareholders get more income. What say you? Apollo Commercial Real Estate, it's not just a REIT, it is a mortgage REIT. It means that they don't go out and buy office buildings, or they don't go out and buy apartments. It means that they go out and buy primarily the first mortgages. Somebody else has done the building, and they're going out and buying the mortgage, they're collecting the interest, they've got servicing rights, which they either can retain or they can sell,

Starting point is 00:06:57 and then they use a lot of leverage. Now, in the case of Apollo, they are not a traditionally highly leveraged mortgage REIT. They currently have about four times their asset value in leverage. Now, what that means, I've always described this type of business as vacuuming up nickels in front of cement mixers. You're going to keep collecting money, and it seems like it's going to work out just fine. But at some point, if that cement mixer moves in a way that you aren't prepared for, it could get very bad very, very quickly. Specifically, in this quarter, the stock is responding to something very specific that happened, and that is a CECL allowance. Now, I know acronyms are great radio. That's called the Current Expected Credit Loss. In this

Starting point is 00:07:50 case, they are taking a $141 million credit loss allowance against an ultra-luxury residential property in Manhattan. They own at least one or several really, really big mortgages and really big pieces of paper that they are suggesting is not performing well. $141 million in an assumed loss is a really big thing for a leveraged company. The company also took about an $80 million loss on its actual investments for the quarter, and that separated the distributable earnings to shareholders before we count the loss, which they would like you to look at, and then there's a negative amount of income distributable to earnings after we actually count the investment loss. That's how I'm going to start reporting

Starting point is 00:08:45 my investments to my family. That's right. Here's my checking account. Now, keep in mind, it is important to note that they are not entirely wrong in wanting you to focus on that first number. The second number does have a huge amount of variance in it because it is incredibly sensitive to interest rates, for example. It would make the company look much more volatile than it actually is if that was the number you focus on. It's obviously something that you need to note. I always recommend people, as soon as they start talking about something like adjusted EBITDA, what are you adjusting for? This is adjusting for the natural variances that happen in the market. It's okay,

Starting point is 00:09:31 but it doesn't mean that the variances themselves aren't meaningless. Yeah. I want to point out too that the reason I'm looking at this is, office in New York City is enough reason to scare off a group of investors. We have office buildings and luxury real estate in New York City, but most of the loan book is in hotels, other residential properties, retail. You like value investing, you like small caps. Is there a misunderstanding here or does the market seem to have a good understanding at a seven times earnings multiple with a 14% dividend? I think that they pretty much got it right. A lot of times with mortgage REITs, what you're receiving in the form of the dividend is also a return of capital.

Starting point is 00:10:13 It's a little bit deceptive for it to be a 14%. You're not getting a 14% return. But I think the market in this case has it right. Just keeping in mind that because they own mortgages and they don't own the real estate itself, their cost structure is very, very different than what you might think of when you think New York commercial real estate. Let's move on to a more fun story than mortgage REITs. Back in June, Overstock acquired Bed, Bath & Beyond's intellectual property for about $22 million. Bill Mann, Bed, Bath & Beyond is back from the dead. Today, Overstock has rebranded as Bed, Bath & Beyond. If you go to overstock.com, it will take you to Bed, Bath & Beyond. In terms of rebrands, what do you think

Starting point is 00:10:57 of this one? I think, actually, this one is brilliant. Overstock.com, over its time, has had such a poor brand positioning, and it had almost no brand credibility. Bed Bath & Beyond, probably the most valuable thing that they had at the end of the day, was actually that intellectual property, which Overstock got on the cheap. Whatever else it is that you think about Bed Bath & Beyond, it is very much thought of as being a good brand. For almost nothing, Overstock is getting to recast itself as an old-line, credible retailer. You and I talk about business almost every day. There are a lot of people out there who might not have even noticed that Bed Bath & Beyond filed for bankruptcy. I think this is very smart on behalf of Overstock.

Starting point is 00:11:59 Yeah. Most of the time, when you hear about a rebrand, usually it's to a new name that nobody knows and the business would like you to be familiar with. But in this case, they're going back to a company that, as you said, people know well, but there will be some key changes. First of which is that Overstock does not own its own inventory, so it's going to be be relying on those third-party suppliers to ship. They claim that the classic 20% off coupon is gone, still on the website today. Gone-ish. Gone-ish. Well, there's a lot of gone-ish. Overstock claims that it doesn't want to sell these one-off, inexpensive items, such as a $4 spatula with free shipping. As of today,

Starting point is 00:12:40 you can get a $4.50 spatula with free shipping. Anyway, let's say, Bill, that they have brought you on as a highly paid consultant to give a PowerPoint presentation on what they should do. What advice are you giving them about this rebrand? Keep in mind that they only bought this in June. I think probably you're seeing the first step rather than the last step. I am looking at, because you're exactly right, and as you said it, I started thinking about some of the best rebrands that I've ever heard. Maybe the best, and I'd be interested in your thoughts was when SBC bought AT&T and then rebranded the entire company AT&T. Everybody had heard of AT&T, but AT&T was a much smaller company by that period of time than SBC. SBC

Starting point is 00:13:30 didn't really have a brand outside of the Southwest. Sometimes it really does make some sense. In the case of Overstock, yes, they probably haven't gotten to the point where they want to be in terms of operations, taking on Bed Bath & Beyond from six weeks ago, they haven't had time to get there yet. I think they would get an incomplete at this point, but they will actually probably need to shift quickly. The thing about intangible assets like a brand is that it's really easy to ruin them. Yes, it is. As we wrap up, we're in the dog days of earnings season and the dog days of summer. What's a trend, company, storyline that you find interesting right now?

Starting point is 00:14:18 You pointed it out earlier. It's the incredible number of companies that seem to be name-checking some form of AI or chat GPT that they are considering or are actively bringing into their businesses. I think we've seen so far, this has been an incredibly benign earnings season so far. One thing to keep in mind, though, is that the S&P 500 in particular is more concentrated amongst its top companies. The top seven are about 25% of the total market capitalization of the S&P. If one of them misses, it is going to feel much worse across the board than it would have nearly at any point over the last 50 years. Bill Mann, appreciate your time and your insight!

Starting point is 00:15:08 Thanks, Ricky. Before we get to our next segment, I wanted to let you know that the latest episode of Stock Advisor Roundtable is now on Spotify. The show is available to members of Stock Advisor, Epic Bundle, and our Advanced Investing Services. I'll put a link in the show notes. Motley Fool co-founder and CEO Tom Gardner catches up with Chief Investment Officer Andy Cross to talk market valuations, Tesla, and Nvidia. Now, if you work remotely, then you can work from anywhere, right, but that flexibility can come with a cost. Robert Brokamp has more. The phrase digital nomad may conjure up images of a modern-day cowboy going from town to town on horseback armed with nothing but a laptop and a Bluetooth dongle. Their battle cry is asking,

Starting point is 00:15:55 can you hear me? On Zoom while jockeying for the best Wi-Fi signal. You may have spotted them at your local coffee shop, maybe in a co-working space, or just posting work selfies from the beach. I ask these digital nomads are defined as workers that are able to do their jobs remotely and take advantage of their mobility to explore different states or even countries as their chosen workplace. But what does all this mean from a tax perspective? Joining us to debunk the top three tax myths of the digital nomad lifestyle is Megan Brinsfield, Director of Financial Planning for our sister company, Motley Fool Wealth Management, and someone who's done a little digital nomading herself. Megan, welcome back to the show.

Starting point is 00:16:33 Why, hello. And if you've listened to shows I've been on before, you know I carry with me this heavy bag of disclosures that I must share with you all. Everything stated here today represents my own thoughts and not necessarily those of Motley Fool Wealth Management or its affiliates. My comments are informational and should not be considered recommendations. Any examples are for illustrative purposes only. While wealth advisors can counsel on tax efficiency and general tax considerations. Motley Fool Wealth Management does not and is not permitted to provide any tax or legal advice. Consult with a wealth or tax advisor prior to making any financial decisions. And finally, Motley Fool Wealth

Starting point is 00:17:13 Management, a sister company of The Motley Fool, operates independently from The Motley Fool. Thank you for that, Megan. And I will just emphasize that since we are talking about taxes, this is a situation where I really do think getting some help helps out. All right, Let's talk about the first tax myth of being a digital nomad, and that is, if I don't live there, I don't have to pay taxes there, or maybe some variations, such as, as long as I stay less than six months, the state can't tax me. That's right. This is the often-cited six-month rule, and this is really for states to consider you a resident of the state. Pretty much any state that has an income tax is going to have a rule to collect non-resident

Starting point is 00:17:56 income tax. And so, you can kind of consider yourself joining the elite taxpayer group that includes people like athletes, performers, entertainers that have to pay what's known as a jock tax or a tax that's collected by the state wherever they perform the services for which they're being paid. The jock tax is probably surprising to people. We talked about it earlier this year when we interviewed Jonathan Scott, who played in a Super Bowl for the Pittsburgh dealers. That is, basically, in many states, as the team travels to that state, they have to pay a tax. I read in one article that California alone collects $200 million in taxes from people who come to compete in its state. It's not just the athletes, it's the coaches, the

Starting point is 00:18:41 trainers, and everyone. The athletes probably have the money, but not everyone on the team has to do this. Basically, what you're saying is, this no longer applies just to your favorite NFL team. It could apply to you if you work in another state. That's correct. Yes. All income that you earn through a job, whether it's self-employment or W-2 employment, has what's known as a source, and it's linked to the location where you're taxed. Essentially, wherever your butt is when you're doing the work is the state that has the right to tax you on it. Each state will calculate their right to tax you based on the proportion that you earned in that state. Just a quick example, if I normally live in Florida,

Starting point is 00:19:23 soaking up the sun, not paying any state income tax, but I spend two weeks working in Virginia, I now have 10 workdays out of roughly 250 workdays spent in Virginia, and Virginia can tax 4% of my income. Okay. That doesn't sound very fun. Are there ways to mitigate the risk? You don't associate taxes with fun? I mean, I don't know. You're the CPA, so what am I talking about here? Yeah, of course. There are some ways to mitigate your risk.

Starting point is 00:19:55 I have three top strategies. One is to situate strategically by working from states that do not impose an income tax. There are what I like to call 8.5. You've got Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming that do not collect a personal income tax from its residents or non-residents. And then New Hampshire only taxes interest and dividends. So if you're earning income from employment, that's not going to apply to you. So if you are working in any of those states, you don't really have to worry about this requirement. And now you might start to see things clicking as to why all these singers do

Starting point is 00:20:35 their residencies in Nevada and Las Vegas. I just saw Garth Brooks. Every time he performs there, he does not owe a state income tax to Nevada, which would be different if he was doing the Taylor Swift heirs tour methodology. Is there anything to the idea that if you don't stay in a state for very long, you don't have to worry about it? There is. Each state has a de minimis calculation that says, if it's below this threshold, we're not going to chase you or worry about it. And that is defined separately by each state. If you just Google the term income tax filing threshold, along with the state that you're interested in, you should get a pretty quick result there for what is the tax filing threshold in that state. All right, let's move

Starting point is 00:21:26 on to tax myth number two. And that is, I'm smarter than whatever state you're staying in and their tax department, they can't catch me anyways. Au contraire. Things have really come a long way in the world of tax auditing, particularly high-tax states like California and New York. They've got a lot to lose by you leaving their state or not reporting your income there. They've developed pretty advanced audit methodologies. One easy flag in their system is, if you're a resident of their state and then you report that you moved to a zero tax state, that can be tracked really easily by their tax department. And they will probably send you a little inquiry, considering a housewarming gift, that asks you,

Starting point is 00:22:13 hey, just want to make sure you've really severed ties with our state. And these can sometimes look innocuous. It's just like, fill out this little questionnaire. Make sure if you work with an accountant, you're always providing that sort of thing to your accountant so you don't inadvertently step into trouble there. I've seen a lot of California residents that moved to Nevada or New York residents that moved to Florida. And New York to Florida is so common that the New York state auditors actually started doing things like looking in people's refrigerators, looking at their veterinary bills, seeing where their dentist is. Yes. So I pulled up an article and this was from, I believe, 2014. It wasn't even recent where a client won their case of non-residency

Starting point is 00:23:03 because when the auditor went and opened the refrigerator, the stuff had been in there for a year and a half untouched. So, kind of crazy to know that that is the type of thing that auditors are looking for. But more than that, the state is aware of high-profile events happening in their state, things that are public are increasingly fair game for audit purposes. So if you are an athlete by chance, thanks for listening, or a high profile CEO or something like that, someone who's traveling for board meetings, or if you're just posting all over social media where you are and how much you earned in a given month, you might be getting a little note from the state tax department. Very interesting. And maybe a little scary. Let's move on to tax myth number

Starting point is 00:23:54 three. If my company doesn't report it, I don't need to either. This is a common myth that if I just get my W-2 from my employer and I put that stuff into my tax preparation program, everything's going to take care of itself. And the problem with that is that the burden is on you as the taxpayer to keep track of these things and report appropriately. Another kind of interesting tidbit is there is a statute of limitations that says the state only has so long to come after you. But in order to start that statute, you have to file a tax return. So, if you never file in a given state, your statute of limitations is basically forever. You would need to consult a lawyer and confirm all of that, but that is what I've seen in practice previously.

Starting point is 00:24:40 But the fact of the matter is that you are responsible for reporting these extra days that you're traveling, at least notifying your employer. A lot of payroll departments do have the capability to withhold taxes for a brief period of time in a state other than your home state. But so many payroll departments just haven't caught up with the times. There's very little software out there that is integrating the HR record, the payroll record, the corporate tax filing record, and all of these things are so intertwined and hairy. If you're traveling all over, I know for accountants in particular who have to go on-site to do audits, those payroll systems are tracking where they are and accumulating a tax in all of the relevant states.

Starting point is 00:25:31 Wow. All right. That's all the tax stuff. But as I mentioned at the beginning of the show, you've actually done this yourself. You have personal experience with digital nomading. So just give us your personal tips, tricks, reflections, maybe things you wish you knew before you started trying it. The few things to consider are technological. Make sure that you're going to a place that has a really strong Wi-Fi connection. There's nothing that puts a hitch in your step, like not being able to connect to the meetings or tools that you need.

Starting point is 00:26:00 So if you're staying somewhere, make sure you're confirming your Wi-Fi speed or connectivity generally if you're using your phone as a backup. up. And then the other thing just practical is time zone. Usually your employer is not going to care if you are nomading around as long as you're sticking to your normal schedule. And so I have never gone to Hawaii to work my East Coast hours. I think that would be pretty miserable. But I have gone to Florida and it's nice to get off work and take a walk on the beach when my normal walks are just the city streets. So, sometimes a change of scenery is all that you really need to re-engage with what you're doing anyway.

Starting point is 00:26:47 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 Ricky Mulvey. Thanks for listening! We'll be back tomorrow. you

Motley Fool Hidden Gems Investing - Uber Makes a Profit

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.