Motley Fool Money - Paypal to Stripe: You’re Going to Have to Do Better Than That

Starting point is 00:00:01 The price for PayPal's buy-up just went up today on Motley Fool Hidden Gems Investing. Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crow, and today I'm joined by longtime full contributors, Lou Whiteman, and Matt Frankel. We are deep into earnings season so far. We had several companies posting today, but of course we can't get to all of them. We're going to cover Boeing's earnings, and we're also going to hit the mailbag. But to start, Lou, you said on our last Thursday show that PayPal was one of the earnings calls you thought was actually worth watching.

Starting point is 00:00:35 Well, we haven't now. Share as of PayPal are up about 4%, maybe a little bit more as we're taping this right now. So I'm guessing that you liked what you saw as much as the rest of the market did. Right. I mean, of course, there's a lot more than just an earnings call here, but we can get into that.

Starting point is 00:00:52 But yeah, the quarter was fine. My takeaway is that this is a healthy, stable company that I have no desire to invest in, to be honest. Revenue is up 5%. earnings per share down slightly but beat estimates. Total payment volume was up 10%, but look, some of that is holding serve in an ever-growing market. I don't know if even like double-digit growth there really impresses me. PayPal is a single-digit growth story with great free cash flow. They continue to buy back their shares. The share count is down about 10% year every year.

Starting point is 00:01:20 It can continue to do that or it can go private and use that cash to pay down the leverage. Each is fine, but going into this, we were interested because, you know, looking at the potential buyout, here. Look, nothing else. There's nothing in this report to suggest they should scramble and take a bargain price just to get out of the game. Yeah, I mean, as Lou said, the numbers, especially the headlines, they were fine. I mean, the fact that Venmo is responsible for the lion's share of the growth, it's worth noting. I mean, 14% of that payment volume growth year year every year was from Venmo. By now pay later volume was up 26% year every year. So it's nice to see that part of the business start to get real traction. It's still a very profitable company.

Starting point is 00:02:06 $1.83 billion of free cash flow in the quarter. As Lou said, they're buying back stock handover fist. They're spending roughly $6 billion annually on buybacks and still have left over cash flow to invest in their own growth. I mean, one interesting point from the presentation they revealed was that they actually mapped out their like a three-year growth plan for this year all the way through 2028, based on when investors should expect to see some of their growth initiatives and cost reduction plans actually show up in the numbers. So I found that really interesting too. Matt, I want to back up for a second. We're talking about, you know, buy now, pay later volumes, Venmo being a lot of the total payment volume gains here. Looking at this business, does it really

Starting point is 00:02:52 matter, like, does it really matter that much which of these business grows the most? Is like, if you're looking at PayPal on the whole, is there one part of the business where you're like, if this one succeeds, it's going to do a lot better than, you know, some of its other parts, I don't know, either it's high margin, whatever sort of trait it is, is there any particular part of PayPal? You're like, if this is doing well, it bodes well for the company as a whole. Yeah. Well, I mean, think of any business where there's two sides.

Starting point is 00:03:22 of which is still in the earlier stages of monetization or realizing its growth potential. Like, I mean, I don't want to compare it to like an AWS and Amazon's e-commerce platform. But, you know, one side of that business is growing faster than the other. And that's like the real story, even though it's the smaller and less mature part of the business. So I would put Venmo kind of in that category in the sense that they're still just figuring out how to properly monetize it. I mean, a lot of Venmo transactions are free. They haven't really figured out how to monetize the platform to the extent they've

Starting point is 00:03:52 monetize the PayPal, you know, consumer checkout programs. So there is a lot of monetization to unlock in the platform. And by now pay later is another good example, as you just brought up. That's something that is upfront fee income that they get. They generally sell the loans to third parties. It's a really good way to add extra monetization on top of a kind of a legacy, as Lou said, a very single-digit growth platform. And the idea is that as Venmo, which has almost as many users as PayPal itself can get their monetization to that level. If that's growing at a high rate, then the overall, it becomes more of a part of the total and the overall top line growth rate could accelerate. Lou, part of the reason we wanted to bring up PayPal was specifically

Starting point is 00:04:36 the acquisition deal. And the original offer that Stripe and its private equity kind of partner here made was for about $60 a share. And as we're taping $58 a share, that's not much of a premium. Normally, if you're going to do a take-private deal, you've got to, you know, pay investors a little bit more than that. So did, you know, based on where we're at right now, did this quarter or anything else, aside from the fact that, you know, the price change, was there anything that really changes the math on how Stripe could actually do or could do a deal here? So to be fair, the non-affected price is somewhere in the 40s. So that is a premium to that. But like, I said before I thought it was too low. I still think it's too low. Again,

Starting point is 00:05:22 The only thing that could have changed in this quarter is was there something where, wow, this business isn't working, so therefore, you know, they need to take a bargain deal. That wasn't it. I don't know if this company can ever grow. I mean, good luck monetizing Venmo. The reason we all use Venmo is because it's free and there's a lot of options if they change that. But look, here's the deal. I think the price is too low.

Starting point is 00:05:46 I'm not sure if there's a higher one coming, though, because right now, Stripe and the private equity firm, Advent International, are exactly 50-50. I don't know how important that is that they keep the 50-50, but it was worth for them to do at that time. I'm not sure how much more Stripe can contribute here. So I don't know if they can really boost this deal price and still keep that ratio the way it is. It's possible that their interest has kind of put PayPal and play. I think a go-private deal makes all the sense in the world here, but only if the price is right. The investor base is increasingly treating this as a yield co.

Starting point is 00:06:27 I think that's correct. But that investor base that kind of understands the free cash flow, understands just the potential to buy down the stock price and just run the business, they're not going to give in to a low price. That's not their nature. So I really think PayPal just stays independent from here. That's my kind of default. Yeah.

Starting point is 00:06:49 And I mean, on the conference call, Loretta, as PayPal's new CEO, he didn't specifically comment on the Stripe offer, and I didn't expect him to, but he did say that the board remains open to evaluating any path that could, as he put, create more value for shareholders than simply executing on their growth plans. So he clearly would expect more than more of a premium than they're getting. And the strong second quarter results kind of give the company more grounds to hold a line at what they consider to be a more attractive offer. I mean, several reports have said that they want about $70 a share to seriously consider any offer, but who knows if that's true, it might not come from Stripe. Someone else could swoop in and

Starting point is 00:07:29 make an offer. But, I mean, the fact that he had kind of neutral comments as opposed to saying something like we're not for sale, you know, it shows that we still could certainly see a deal, just not at the $53 billion that they're currently offering. Yeah, no, to be fair, if he said, no way we're not going to consider it, I'll lead the shareholder lawsuit. So I don't know how much You can really read into that. But yeah, I think, look, a lot of their institutional investors want something closer to 80 than 70 even. So I think there's a huge gap here. Again, that's why I come back to, I think it's going to be a yield code from here.

Starting point is 00:08:04 Coming up after the break, we're going to dive into Boeing's earnings. Introducing Fidelity Trader Plus, the next generation of advanced trading from Fidelity. Customize your tools and charts and access them seamlessly across desktop, web, and mobile. For faster trades, anywhere you go. Try the all-new Fidelity Trader Plus. Learn more about our most powerful trading platform yet at Fidelity.com slash Trader Plus. Investing involves risk, including risk of loss. Fidelity Brokridge Services LLC, member NYSE, SIPC.

Starting point is 00:08:41 Kind of similar to PayPal. Shares of Boeing are up about 4% today as we're taping after the company's results came in slightly better than expected. Setting aside the continued challenges that they've seen of this Air Force One contract and trying to get this, you know, program, I think it's been in the planning or at least for at least five years now. That seems to be the big challenge. But otherwise, everything looked pretty good, right? Yeah, I think so. I mean, look, up 4%. To put it in perspective, just a week ago, Lockheed Martin was up 10% plus post-earning.

Starting point is 00:09:15 So I think, you know, a positive but mutative reaction feels about right. It's still a loss, but the loss is better and expected. The loss mostly due to charges, like as you say, the New Air Force One, but there are other programs too that just we know about. These are existing issues that are just going to take forever to get off the books. The thing they'll look out here is commercial. Commercial is the most important part of the business. Operating margin of only 2.7%, but that's good to see because we were expecting a slight loss.

Starting point is 00:09:43 On defense, look, they're not set up the same way as Lockheed or North of Grumman to kind of benefit from this munitions restock the way to the extent that their rivals are. There are opportunities for growth, but it's just not the near-term catalyst. So I think holding serve here is fine. Yeah, I mean, if you forget about that Air Force One miss, you know, revenue grew by 8% year every year, handily came in above expectations. Commercial deliveries, as Lou mentioned, is the most important thing here. was up 14% year every year. We saw 737 production stabilized, which it's been a while since we used stable and 737 in the same sentence. On the conference call, your CEO, Kelly Ortberg, said that the uncertainty in the business is going away. So, you know, it was a solid quarter.

Starting point is 00:10:33 Overlook the Air Force One stuff, and it's a really solid quarter. I feel like the 10, 15 years that we've all been together doing this, it's been a very long journey for Boeing, trying to fix the myriad of things that have ailed it over the years. And I think it is fair to say it's starting to show the fruits of those efforts. Not exactly a linear trajectory, but it's getting better, right? So with that kind of in mind, like it's getting better, it's improving some of the worst egregious errors that the company have does seem to be behind it. Is this company finally looking like something worthy of an investment? Or is it just kind of another step, in the very, very long journey towards earning investor trust.

Starting point is 00:11:16 If they can get their act together, especially on the commercial side, the stock is undervalued, period. It is undervalued. And knock on wood, we now have a few consecutive quarters that operations look fine, strong. I think that it does go up from here, but I wouldn't be in any rush to buy in. They still have $45 billion in debt. In 2019, they had less than $10 billion. between COVID and the 737 max crisis, they leveraged every piece of equipment.

Starting point is 00:11:46 They probably have loans on some staplers, using staplers as collateral. They just took in all the death they could to make sure they survived, but you have to pay that down. That 45 to less than 10, that's a good sign of how long this turnaround is going to take. They're slowly ramping deliveries, as Matt said, they're on track to get to 47 per month on the 737 soon. pre-crisis, they're expected to be in the mid-60s right now. So that's just some perspective on how far they have to go. But more deliveries does mean more cash flow, which over time will mean less debt. I think they have re-earned my trust.

Starting point is 00:12:23 I think they're on the right path. The question is, what is the opportunity cost of waiting on a turnaround that really, honestly, they might not be back to 2018 levels until almost the end of this decade. Yeah. So as Lou just said, that Boeing has re-earned his trust, but I think, on the other hand, it's fair to say that the Boeing hasn't really re-earned the market's trust completely yet. The market hasn't totally bought into this turnaround. Even after today's increase, Boeing is still down over the past

Starting point is 00:12:51 year. And I would argue that the numbers look a lot stronger and more stable than they did a year ago. But things definitely appear to be moving in the right direction. I mean, Lou mentioned the debt load, which is years away from being meaningfully reduced toward previous levels. But on the other hand, we are seeing clear signs of the company turning a corner. Just another thing to mention, the FAA restored Boeing self-certification authority on July 20th. You know, that's a big sign of regulatory trust after years of additional oversight. So I'm not investing just yet, kind of like how Lou said with PayPal, it's a cash flowing business that he doesn't want to touch. Boeing's kind of that for me.

Starting point is 00:13:29 I'm not investing yet, but it's starting to look like the instability is clearly calming down. Just on where the market is, it's kind of worth noting that on an enterprise value basis, we're finally back to where we were at 2018. Again, I think it's mostly the debt. Again, debt is taking what should go to equity holders right now as they pay down that debt. That is the opportunity. What I find actually most fascinating about following Boeing, not necessarily because I'm like super jazz to find out when I need to buy into the turnaround.

Starting point is 00:14:01 But Boeing and basically Airbus, I mean, yeah, sure. Comac, but not really. You know, these two companies, Boeing and Airbus, are the gatekeepers of the commercial aerospace industry. There are dozens, maybe even hundreds of, like, I would consider great businesses whose prospects kind of wax and wane with more or less how much Boeing and Airbus have their act together at any given time. You know, there's a bunch of original equipment manufacturers, and you have all the aftermarket

Starting point is 00:14:28 parts and services companies. Depending on where Boeing and Airbus are at any given moment, you know, you could have incredible companies, kind of either going through a lull or absolutely doing it very well. So did today's results, thinking about kind of the downstream effects of what we're seeing here, does it make any connections that made you say, I need to check in on blank stock? You know, from a supplier perspective, the big question is when the music will stop. Boeing's commercial booked a bill in the quarter was 1.4x. They booked a buck 40 in future revenue for every $1.1 they built.

Starting point is 00:15:05 That's good. It's not great. But, you know, look, the problem with the suppliers right now is valuations are so high across the board, 40, 50 times future earnings on a lot of these. That is probably too much to pay, especially when just simple capacity constraints limit growth from here. But I see no sign the music is going to stop anytime soon. I don't think it's time to take your gains. I think you can get just market tying, if not slightly market beating games from here. I just don't know if they're the greatest, it's the greatest time to buy in. Yeah, I mean, there are a few Boeing suppliers on my radar. And Lou's right, some of the suppliers that could benefit most from this are trading for kind of nosebleed level valuations right now. Just to name a few like GE Aerospace, Howmet Aerospace, Transdime, there are all Boeing suppliers that are on my list. And if they experience any significant price weakness, I might take a look.

Starting point is 00:16:00 MoG is one that I still kind of like at the current valuation. It's spelled Moog. It's pronounced Moog. But that's one that looks pretty interesting right now. Just a quick follow up on this, though, because as you were saying, Lou, the original plan, like pre-COVID was for 737 deliveries to be somewhere in the 60s instead of 47. And part of the reason that so many of these suppliers are capacity constrained is because Boeing isn't quite up to what its expectations were. If we were to see Boeing get to that, you know, 60 deliveries a month of 7037s, 780, 780s, 780s. Dreamleaders ramping up as well and they get the triple seven X sort of up and running, does that

Starting point is 00:16:38 change the equation for some of those companies? Kind of, but for one, that's going to take a long time. We are now debating going from 42 to 47 and what that entails, and that's a slow six-month process. So, you know, hurry up and wait on that. And kind of, as Matt said, it's because some of the names he mentioned, Halmetz trading it 56 times expected earnings, GE Aerospace, 45 times expected earnings. I would argue that that's already priced in.

Starting point is 00:17:04 Coming up after the break, we're going to hit the mailback. Introducing Fidelity Trader Plus, the next generation of advanced trading from Fidelity. Customize your tools and charts and access them seamlessly across desktop, web, and mobile. For faster trades, anywhere you go. Try the all-new Fidelity Trader Plus. Learn more about our most powerful trading platform yet at Fidelity.com slash traderplus. Investing involves risk, including risk of loss. Fidelity brokerage services LLC, member NYSE, SIPC.

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Starting point is 00:18:11 Today's email comes in from Avinash Asar and has related to electric vehicles. Hi, Matleyful Team. In your opinion, why hasn't the EV vehicle revolution caught up with consumers, especially considering the volatile oil prices, EV vehicles providing good alternative, reducing gas bills? I would also like to know some of your opinions on some specific EV makers, especially, I'm guessing, lucid, ticker is lucid. Do you think this particular company is going to survive as a company kind of regards? So I'm going to give a quick premise here because I actually live overseas and I'm going to say EV adoption rates of where I'm living and other places I've been in Europe much, much higher than we're seeing in the U.S. So maybe I might even turn the question a little bit to you guys is like adoption rates in the U.S. are considerably slower.

Starting point is 00:19:00 So what might, you know, be causing that? And then we'll get to the question specifically about Lucid. All right. So global EV worldwide adoption, okay, it is up in the 20s, but it is still only 20%. It hasn't replaced ice. And to be honest, it's still early generation technology. People can talk about the recharging isn't so bad, but it adds friction. And change doesn't tend to accelerate past early adopters if there is added friction to making the change. We want things to be like for like before mass market appeal comes. The other element is we're not, this isn't a binary decision. Hybrids, greener and internal combustion engines, all of these things are bringing up gas mileage stats. They are credible alternatives to the status quo.

Starting point is 00:19:47 Consumers can save them fuel relative to a decade ago without going electric. So why will the, what's the real motivation to commit to all EVs? I think many options in between like yesterday's engines and today's electric are taking up a lot of share here. As for Lucid, do I think it'll survive? Look, the automotive business is brutal. Even when times are good, these companies tend not to be great investments. Tesla is the exception in the fact that they made it, but they're not the rule.

Starting point is 00:20:16 I think most auto startups are destined to not be independent over time. The best of them will be acquired. the worst of them will just kind of fade into nothing. Lucid, I fear, I don't know if they'll be able to find a buyer, but I don't think they will be an independent company in decade from now. So a little pushback, but Lou is right that EVs are still a new technology, very much so. That's the primary reason I broke my financial planner rule and actually leased a car when we bought our first EB. The tech is evolving so quickly.

Starting point is 00:20:44 Who knows what EVs are going to look like in three years? There's that range anxiety. We took it on one road trip, and that's going to be the last road trip we take in this car. So we didn't want to get locked into what could be a different product in three years. There are a few practical reasons why EV adoption hasn't been higher in the U.S. to answer Tyler's question. The federal EV tax credits that went away right around this time last year, at a time when EV rollouts were really starting to accelerate, that was a big hit to the industry. Until the Iran War, remember, gas prices were not especially high when you compare them to the last 10 to 15 years. so people really weren't in a hurry to adopt them when the tax credits were friendly.

Starting point is 00:21:23 And outside of major metropolitan areas, charging infrastructure really hasn't been built out as much in places like where Tyler lives. So as far as Lucid goes, I think that the company will survive in one form or another, whether they get acquired, whether they're independent, but common shareholders could ultimately be wiped out or essentially diluted out in the process. I think Lucid's down something like 99% since it went public when you, you know, on an adjusted basis. There's no doubt that the product is great, but the company is bleeding cash, and it could make more sense as part of another company. It's got great technology.

Starting point is 00:22:00 My top EV play is General Motors. I like the boring approach. Unlike a company like Lucid, they're funding their EB expansion from a position of financial strength. The EB business itself, if it were a standalone business, it would be on track to achieve cash full. break even by the end of this year. Now, they're clear number two market share of EVs in the US only behind Tesla. And GM has something that other EV makers don't in that growing software revenue stream. Their super cruise technology, it's, you know, it's becoming kind of commoditized in this self-driving world. But it is creating a nice, you know, software revenue stream that helps boost margins. And companies like Lucid don't have that. So I like the advantages. I like

Starting point is 00:22:46 the valuation better, and I like the fact that they're probably still going to be an independent general motors in five years. I do remember, I think, pre-2014 was there was a lot of initiative and like market change around like hybrid vehicles and real like pushes towards like gas conservation and stuff like that because we were in like 110, 120 barrel oil for like a four or five year period. and then we had this long-tailed shale oil, the price of oil dropped from the mid-20, you know, from like 2014 onwards. And it basically completely changed buyer behavior in vehicles. I will be interested to see if we do have a period of sustained high oil prices, high gas prices, basically fuel costs for anybody, if that actually does change consumer behavior in the United States to what you were saying, Matt,

Starting point is 00:23:42 There hasn't been enough of a pain point at the pump to really incent anyone to make that shift yet. But if you were to see sustained high prices, there might be a little bit more, you know, and consumer appetite relative to other places around the world. And, you know, to that whole point, gas prices outside of the United States and a lot of other places are much higher, especially Europe. And that's part of why they have been adopting in a much faster rate. As always, people on the program may have interests 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.

Starting point is 00:24:14 All personal finance content follows Motleyfuel editorial standards, and it's not approved by advertisers. Advertisements are sponsored content and provided informational purposes only. To see our full advertising disclosure, please check out our show notes. Thanks for producer Dan Boyd and the rest of the Motlefield team. For Lou, Matt, myself, thanks for listening,

Starting point is 00:24:29 and we'll chat again soon.

Motley Fool Money - Paypal to Stripe: You’re Going to Have to Do Better Than That

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