Motley Fool Hidden Gems Investing - When Rule Breakers Find Religion (or, at least profits)

Episode Date: November 4, 2025

Spotify, Shopify, and Uber were once the poster children for “growth at any cost.” Today, they’re talking cash flow, margins, and discipline. In today’s episode of Motley Fool Money, host Emily Flippen is joined by analysts Jason Hall and Jeff Santoro to dig into what these “reformed Rule Breakers” are getting right - and where the risks still lurk. They discuss third quarter earnings reports for: - Shopify and how its business stacks up against Amazon and agentic shopping in the battle for online commerce. - Spotify’s margin makeover, and how the business has created scale in an industry many were skeptical of - Uber’s transformation from “broken IPO” to cash-flow machine, and how its pricing algorithm has unlocked margin potential Companies discussed: SHOP, SPOT, UBER, GRAB Host: Emily Flippen, Jason Hall, Jeff Santoro Producer: Anand Chokkavelu Engineer: Dan Boyd, Natasha Hall Disclosure: Advertisements are sponsored content and provided for informational purposes only. The Motley Fool and its affiliates (collectively, “TMF”) do not endorse, recommend, or verify the accuracy or completeness of the statements made within advertisements. TMF is not involved in the offer, sale, or solicitation of any securities advertised herein and makes no representations regarding the suitability, or risks associated with any investment opportunity presented. Investors should conduct their own due diligence and consult with legal, tax, and financial advisors before making any investment decisions. TMF assumes no responsibility for any losses or damages arising from this advertisement. We’re committed to transparency: All personal opinions in advertisements from Fools are their own. The product advertised in this episode was loaned to TMF and was returned after a test period or the product advertised in this episode was purchased by TMF. Advertiser has paid for the sponsorship of this episode. Learn more about your ad choices. Visit ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Earnings season continues, but we're diving into more than just the headline numbers. Today on Motley Fool Money, we dive into the narrative driving results for Spotify, Shopify, and Uber. It's Tuesday, November 4th. Welcome to Motley Fool Money. I'm your host, Emily Flippen, and today I'm joined by Fool analysts, Jason Hall and Jess Santoro to discuss three reformed rule breakers and what their recent earnings say about how these companies have turned themselves around. Jason, I know Shopify is one of your favorite

rule breaker stocks. I mean, in my opinion, they've had a few missteps in the past. There are some concerns around its MLM feeling initial expansion and then that failed push to fulfillment after the pandemic. But the business has done a great job of attracting new merchants and volumes through the successful expansion of its subscription style solutions. So when you combine what we're seeing today in Shopify's third quarter earnings with its long-term opportunity. What is standing out to you? All right, Emily, I'm going to take issue with the failed logistics line you just tried to sneak past me. They moved into logistics when the cost of capital was essentially zero, and they got out of it just as quickly when rates skyrocketed

and the math no longer worked. But most importantly, they locked up the access to a great fulfillment partner for their merchants. That was the real goal for the long-term, to give companies an alternative to selling their soul to Amazon Fulfillment. You didn't ask me about that. All right. So I'll back off a little here. No, it's fair. Asked about Q3's results within the context of the long-term opportunity. Now, what we're seeing is Shopify's powerful, sticky platform continues to be the gold standard for merchants and global brands who want a do-it-all platform for commerce. Revenue and gross merchandise volume both increased 32%, while the company continues to spend to grow and maintaining its edge. Both sales and marketing

and R&D expenses continue to increase. The good news is they're not growing as quickly as revenue is. That's good. And I think it's something that we want to see continue. But there was some not so good on the cost and expense side of the ledger. Cost of revenue, especially cost tied to merchant solutions, that continues to increase faster than revenue. That's taking a bite out of gross margin. So even with expenses increasing slower than revenue, that lower gross margin is weighing on earnings growth. Now, management's calling for more of the same next quarter and also saying that revenue is going to grow at a slower rate than we just saw. That's causing investors to pump the brakes today. Shares are down in trading. The stock's been on a crazy good

run over the past year or so. Now, the bigger question, can Shopify continue growing? I started peeling back the layers a little bit. It's a little bit nuts. By some measures, you could sort of squint and say it's already bigger than Amazon. Amazon's online stores revenue was about $265 billion over the past four quarters. Shopify's gross merchandise volume, that's the total revenue of merchants on its platform, $350 billion. That's bigger. But you've got to add Amazon's third-party sales and other things back in, and that makes its e-commerce business about $450 billion. So it's definitely a stretch to say Shopify has passed Amazon. That's not the point. to talk about how much Shopify has grown and stress how gigantic commerce is and increasingly

how more of it is happening online. Shopify is just way ahead of everybody else with the tools to empower more sellers to make the most of that. I understand that. Honestly, it's shocking to me when I go and I purchase products online, how often I'm redirected through ShopPay, which I guess I have an account for. It's amazing. You probably have an account for it too. If you're listening to this podcast, you just might not be aware of it. And that has a lot to do with the scale that you've been talking about. But I mean, Jeff, I don't like to be an AI alarmist here. And in fact, I think oftentimes I can be overly dismissive, but I mean, I can't help but face the fact, the reality that we're living in a world that I think is driven by AI and new partnerships

like PayPal's recent agreement with open AI. And that could drive structural changes in the way that I think commerce happens, even digital commerce. So when you think about the future of a Gentic shopping. I mean, is that a threat to Shopify and its payments platform? I think it could be. I mean, but we have to remember Shopify signed its own agreement with open AI about a month before PayPal did. So they're not completely cut out and they're likely to continue to seek out more deals like this in the future. The obvious risk to Shopify here is if you're on chat GPT, you're searching for something that is on sale in a Shopify merchant store, but then you pay with PayPal because the button's there. Now Shopify loses its cut of that

transaction. On the other hand, you could make the argument that if that makes it more frictionless to buy things through ChatGPT, then maybe Shopify ends up doing better in volume, if not on individual purchases. So there is two sides to that coin. Two other quick points, though. There's no evidence yet that people actually want to shop inside ChatGPT. I mean, I think that's an untested theory. People have tried this before. If you remember, Pinterest made an effort to get people to buy within the Pinterest app. That didn't work out so well. I think the jury is still out on whether this will actually shift consumer behavior. Lastly, we're still in the early innings here with agentic shopping generally. I think we're going to see more deals like this

with other LLMs. There's no guarantee that ChatGPT is the long-term winner here. There's going to be other opportunities for these kinds of partnerships. I think that's a fair point. I'd add in, in addition to Pinterest, an example being Google and their shop features. I'm sure it gets some level of engagement, they haven't gotten rid of it the way they did their social media arm. But it certainly didn't replace the need for, say, the Shopify's of the world. But that being said, there was a time where people would say there's no future for digital commerce too when the internet came around because people were so afraid to put their credit card information. And now I just give my credit card information to any old website that's

asking for it. So the times do change here. So it'll be interesting to see how AI as well as the total gross merchandise volume and how large of a platform Shopify has built continues to develop over the course of the next few years. This earnings, in my opinion, was just one step in that direction. Up next, we're picking apart Spotify's earnings and where the business could go from here. Stick with us. Welcome back to Motley Fool Money. Spotify is in the spotlight today after reporting third quarter earnings that were, in my opinion, pretty stellar across the board. I mean, Spotify is this classic team rule breakers recommendation and the Motley Fool's flagship service of Stock Advisor. And Jeff, when we initially recommended it, there was a lot of

fair concern about the business, in particular about its ability to expand their gross margins given the license structure of the music streaming business. But over the past few years, Spotify has proven that its value-added services combined with that renewed focus on profitability could generate substantial cash flow. It looks like we're seeing that again in their third quarter. I mean, operating profits stood out to me, which were up nearly 30% year over year. When you personally look at these results, what stands out for you as what's next for Spotify as part of this turnaround story? Well, you guys were right to be concerned about Spotify's margins in the past, but the company has shown really impressive progress. So just real quickly,

the gross margin that was reported today for the third quarter, that was 31.6%. That's up from 31.1% a year ago and 26.4% two years ago. So you can see the progress they've made over the last couple of years. And you mentioned a minute ago, the increase in operating profits. So that all looks great. This signals to me that they're diversifying the revenue streams, they're cutting expenses, and maybe most importantly, they're finally gaining some leverage in negotiations with record labels, right? As they gain scale, they should have a little bit more to bring to the table when they're trying to negotiate those deals. I still have concerns about the turnaround here. If you look into the results from today, revenue growth and average revenue per user are

slowing. The growth rate is slowing. Now, they've used price hikes as a solution to this in the past to squeeze out some more revenue from the subscription side of their business. But with deep-pocketed competitors like Apple and Amazon Music, I'm not sure how many more times they can pull that lever to get the growth train back on the tracks. I mean, I am a Spotify apologist here. I will say, in Spotify's defense, they were a decade late to the podcast game in comparison into Apple. I mean, Apple had a huge lead and they really squandered that. I think Spotify built just an incredible platform. And we've seen a lot of that turnaround happen. But I mean, you make good points, Jeff. And Jason, I mean, when I think about my key concerns with Spotify,

one of it has just always been how big this platform can really get. What does the growth in users look like? And it's really hard for me to conceptualize just how large their platform is. as of this quarter, they're boasting over 700 million monthly active users. I mean, that's like somewhere around 10% of the total world population. And that's a number that grew double digits this quarter. It's crazy. I mean, can they continue to grow? And is that actually important? So I think it's important, but really, I think what Spotify is really focusing on doing is growing all of its users and kind of for two different reasons, but especially premium users by constantly adding more features and things that people are willing to pay up for it.

If you look behind the numbers, premium subscribers only make up 39% of users, but 90% of revenue and almost certainly the bulk of gross profit. Premium subscribers continue to grow faster than total monthly average users. And likely much of that growth is free users that are converting to get access to features available only to subscribers as they continue to add just more free users to backfill that. Now, it's smart because you have the massive audience that the publishers want, network effect. And then you get to leverage those features that an increasing share of users will pay up for. That's the monetization issue. The reality is the ad business is not great. It's really just the premium users that are

driving the money. Now, as to finding growth, there's some numbers we can put behind that too. The global podcast market is estimated to be about 600 million users by the end of the year and still growing at a really high rate. Music is, not to be too punnish here, it's universal. There are more than 8 billion people on the earth. I think Spotify can keep growing. Now, the double-digit rates that we've seen, we're not going to see that in perpetuity. But more importantly, it's at a point where its unit economics make every incremental dollar worth more. Revenue was up 7%. Operating cash flow was up 16%. I think you hit the nail on the head there, Jason. Speaking as a Spotify user myself, a paying subscriber, I also pay a little extra

every month for extra audiobook listening hours. Now, that's not part of their core podcast initiative, but it's these little upsell opportunities that I think really allow Spotify to shine. And it's that monetization potential that, in my opinion, can expand far beyond just the sheer number and user growth. But to your point, there's still a lot of white space out here. They can continue to grow. I just updated my settings for lossless audio, and I'm really excited to get better quality audio from the music part of it. I am trying to hold back my excitement there. Spotify had been promising this for a while. We'll see what the feedback is like from users. But there's just such a failure of other options

that even if the launch of lossless audio goes poorly for Spotify, I don't know that it actually has any sort of financial ramifications for the company. Agreed. Coming up next, we're going to be diving into Uber's third quarter and evaluating if its new pricing mechanisms are really working out as planned. Stick with us. Welcome back to Motley Fool Money. As we wrap up today's show, let's discuss one of the most controversial rule-breaker stocks that is also reporting today, and that is Uber. When Uber hit public markets all the way back in 2019, it was considered by many, I think I was one of them, that it was a little bit of a broken IPO. It was sporting billions in operating losses. It was only driving adoption through really aggressive promotion

pricing. And just in the past few years, though, Uber has just made dramatic strides towards profitability. Yeah, part of that is managing operating costs, but also just creating more profitable pricing algorithms and raising the fees associated with a lot of their trips. Jason, when I look at this quarter, management said generative AI was actually key to improving productivity. Do you think that's actually what's most important for Uber's long-term success, or is it something else? So I think Uber will continue to be smart about managing costs and AI is one of the ways that they can actually do that from a productivity perspective. I think the one thread that CEO Dara Khosrowshahi pulled the most throughout his prepared remarks was the

willingness to sacrifice cost or expense, not to cut, not to try and control cost or expense, but to sacrifice it in the near term if it meant building something stronger in the long term. I'll paraphrase a little bit. He wrote extensively about the shift from focusing on individual drivers for supply to what they describe as a more hybrid future. This is the company that sold off its autonomous vehicle business and is now increasingly seeing more autonomous vehicles start to come on its platform in markets. It was about building the bigger platform. In Europe, for example, it has several large fleet partners that supply drivers instead of just the individual drivers that are such a thing we're familiar with in the U.S.

So, we've seen delivery become a bigger part of the business as well. And that's a differentiator for users and drivers both, and certainly for the bottom line over time. So, I think Dara's focus on building the platform since day one, no matter what users are looking for, and increasingly, no matter who's providing or what is providing the ride or delivery, that's really kind of the key thread. We saw both rides and trips grow at some of the fastest rates since the IPO this quarter, too. Here's a big number that boggles the mind. They're estimating that by the end of the year,

they will support 14 billion trips this year. You hinted at it before, but do you remember when all the headlines around the IPO were that for every $20 trip, the company had to pay $30 to provide it? Dara has turned this business into a cash cow monster at scale. It's absolutely incredible. The Uber bulls back in the day were saying that they'll eventually get to the point where they've reached critical mass enough where they can start charging more for these trips. And that's largely what we've seen happen. And just to throw another rule breaker stock out there, we have results out from Grab today. And the headlines, in my opinion, were also looking good. But Grab is another Southeast Asia-based mobility business. You

can imagine an Uber, but in Southeast Asia. And they're doing the same thing. They're really unprofitable right now. And they're driving a lot of adoption through promotions. But they're building scale that when they reach critical mass, they should theoretically be able to raise prices enough to generate a cash flow machine. But Jeff, I mean, there's costs, right? As investors, you look at the cash flow and you're like, wow, billions of dollars in trips, billions of dollars in cash flow. This is amazing. But they have come under fire a bit, Uber has, for its pricing practices. I mean, they utilize dynamic pricing to potentially incentivize users while also monetizing users who are willing to pay more. They claim not to use any private data or information

as part of this process. But the reality is that trips have gotten more expensive. People don't like that. They got some pushback, both from regulators and consumers. So, is that pricing strategy actually beneficial for the company when you think about its long-term potential? Long-term, I have some concerns. Putting my human being hat on, I'm not a huge fan of the dynamic pricing. Surge pricing is one thing. I get why that works. There's an economic argument for that. There's some potentially discriminating ways this other type of pricing could be done. This is not necessarily a discriminatory example, but if your battery is super low, maybe you're going to pay a little bit more because you're in a rush to get in a car, right?

Things like that, I think, rub people the wrong way, even if they can understand the logic behind surge pricing. And with Congress and the FTC already making noise about this, I'd be shocked if at some point this doesn't become a liability. But putting my investor hat back on, it could be a long time before regulation actually forces anything to change here, just with everything going on in Washington right now. So unless there's some really organized pushback by consumers in the short term, Uber is likely going to keep benefiting from these pricing models for the foreseeable future. So I think the bottom is on Walmart in the past. Come on guys. This is, they're just the obvious target here. I don't think this is going to go away. Um, I think it's good for

customers and for the business like it or not, whether it's surge pricing or just the dynamic model, that's an extension of that. I think this is not going anywhere. I think they have, you have to keep an eye on it though, if you're an investor here, cause it potentially could come under scrutiny at some point. I don't know. You might like it. I dislike it, Jason. I am a fan of the common person. Apparently, you are not. I just want my ride when I want my ride, okay? Yeah, I find myself conflicted about it because on one hand, this is the undeniable reason why Uber is generating as much cash flow as it is. Their ability to understand how much they can charge per ride, how much to pass along to their drivers, and how much to keep for themselves and

as a result to benefit shareholders. But on the other hand, I have been overly dismissive of consumer pushback in the past. Target is a great example. I did not think the boycotts against Target, even as long-lasting as they've been, would result in such a decrease in foot traffic. There's a lot of factors that go into that. But I don't know. It's hard to dismiss consumers when they really don't like something. It's hard to get people to get back once they've already written a company off. I think the other problem is Lyft does the same thing, and they're the biggest competitor to Uber. So I think the other way you stop this is you get a competitor that does it differently and maybe pull some share from the leaders.

Great point. Jeff, Jason, thank you both so much for joining today. 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. All personal finance content follows The Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. Jason Hall, Jeff Santoro, and the entire Motley Fool Money team. I'm Emily Flippen. We'll see you tomorrow.