Motley Fool Money - Uber Makes a Profit

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Starting point is 00:00:18 If you're 45 or older and at average risk, ask your health care provider about the Coligard test. Coligard is available by prescription only. Learn more or request a prescription today at colagard.com slash screen. 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.

Starting point is 00:00:52 Bill, good to see ya. Hey, Ricky. How you doing, man? I'm doing pretty well. Thanks for asking. So 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 analyst expectations and is up from a 2.6 billion. million loss in the year prior. CEO, Derek Hashra Shahi, took what I would call a mic drop on the earnings call for hitting that green operating profit, also $1 billion in free cash flow.

Starting point is 00:01:24 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 down. 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 make a profit. But yes, so they've done it. It's great. Not 100% sure that this is, you know,

Starting point is 00:02:19 that this is the mic drop situation that the CEO is suggesting it is. Yes. The quote from the earnings call from Kasha Shahi is, quote, many observers over the years boldly claimed that we would never make any money. And I understood why they felt that way, end quote. 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, and the very first analyst question is about large language models. That's right. We need to hear not so much about money, but we need to hear about your generative AI program, which is going to revolutionize

Starting point is 00:03:08 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. So, again, it was a great quarter for them. It actually was, and 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. Or how about promising profitability in every quarter moving forward?

Starting point is 00:04:00 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. I mean, maybe he feels like at this point, I did it. We've made it into the green. I've got I've got a new adventure in front of me.

Starting point is 00:04:38 The freight has been their weak point. It is the part of their business 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? You know, eh, you know. 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

Starting point is 00:05:14 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. I mean, forget AI. I mean, someone's showing up and giving you 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 is a small cap and a value investor bill.

Starting point is 00:05:51 It is a REIT. It's called Apollo Commercial Real Estate. They reported earnings yesterday. It's sub-2 billion dollars. 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 it. Almost all of its debt is floating rate and the company trades. It's seven times earnings. They will pay you a 14% dividend to wait.

Starting point is 00:06:21 The CEO, Stuart Rothstein, says that this floating rate debt is good because it means more borrowers or paying more to service their debt and shareholders get more income. What say you? Apollo Commercial Real estate, it's not just a reed, it is a mortgage reed. So 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. So 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, and then they use a lot

Starting point is 00:06:57 of leverage. Now, in the case of Apollo, they are not a traditionally highly leveraged mortgage reed. They currently have about four times their asset value in leverage. Now, what that means, I've always described this type of business is as vacuuming up nickels in front of cement mixers, right? Like, 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 mix or moves in a way that you aren't prepared for, it could get very bad, very, very quickly. And 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

Starting point is 00:07:46 current expected credit loss. And in this case, they are taking a 141 million credit loss allowance against a luxury and ultra-luxury residential property in Manhattan. So, 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 sort of separated the, what is it, the distributable earnings to shareholders before we count the loss, which they would like you to look at.

Starting point is 00:08:38 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 my investments to my family. Here's my checking account. Now, keep in mind. Now, it is important to note that they are not. entirely wrong in wanting you to focus on that first number. Because the second number does have a huge amount of variance in it because it is incredibly sensitive to interest rates,

Starting point is 00:09:05 for example, and 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, right? I always recommend people as soon as they start talking about something like adjusted EBITDA, you know, What are you adjusting for? This is adjusting for the natural variances that happen in the market. So it's okay, but it doesn't mean that the variances themselves aren't meaningless. Yeah, and I want to point out, too, that the reason I'm looking at this is office in New York City is like 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.

Starting point is 00:09:53 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. So a lot of times with mortgage rates, what you're receiving in the form of the dividend is also a return of capital.

Starting point is 00:10:12 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, but 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 rates. Back in June, Overstock acquired Bed Bath and Beyond's intellectual property for about $22 million. Billman, Bedbath and Beyond, is back from the dead. Today, Overstock has rebranded as Bedbath and Beyond. If you go to Overstock.com, it will take you to Bedbath and Beyond. In terms of rebrands, what do you think of this one?

Starting point is 00:10:57 I think actually this one is brilliant because Overstock.com, over its time, has had such a poor brand positioning, and it had almost no brand credibility. And Bedbath and Beaheufth and Beahe 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. So, whatever it else it is that you think about Bedbath and Beyond, it is very much thought of as being a good brand. So, for almost nothing, Overstock is getting to recast itself as an old line, credible retailer. And, you know, you and I talk about business almost every day. There are a lot of people out there who might not have even noticed that Bedbath and Beyond filed for bankruptcy. So I think this is very smart on behalf of Overstock.

Starting point is 00:11:58 Yeah, most of the time when you hear about a rebrand, usually it's to a new name that nobody knows in 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 relying on those third-party suppliers to ship. They claim that the classic 20% off coupon is gone, still on the website today, and also Gone-ish. Gone-ish.

Starting point is 00:12:29 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 $4.4 spatula with free shipping. As of today, 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? Yeah, so keep in mind that they only bought this in June.

Starting point is 00:12:57 Right. So 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. Because everybody had heard of AT&T, but AT&T was a much smaller company by that. period of time than SBC. SBC didn't really have a brand outside of the Southwest. So, sometimes it really does make some sense. So, 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 bedbath

Starting point is 00:13:47 and beyond, what, from six weeks ago, they haven't had time to get there yet. So I think that they would get an incomplete at this point, but they will actually, probably need to shift quickly because the thing about intangible assets like a brand is that it's really easy to ruin them. Yes, it is. And 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? You know, you pointed it out earlier.

Starting point is 00:14:19 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. So if one of them misses, it is a lot of them. going to feel much worse across the board than it would have nearly at any point over the last 50 years.

Starting point is 00:15:05 Bill, Matt, appreciate your time and your insight. Thanks, Rick. 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 Full 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

Starting point is 00:15:36 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, 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.

Starting point is 00:16:14 But what does all this mean from a tax perspective? Joining us to debunk the top three taxmists of the digital nomad lifestyle is Megan Brinsfield, Director of Financial Planning for our sister company Motley Fool Wolf Management and someone who's done a little digital nomadding herself. Megan, welcome back to the show. 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 Motleyful wealth management or its affiliates. My comments are informational and should not be considered recommendations.

Starting point is 00:16:55 Any examples are for illustrative purposes only. While wealth advisors can counsel on tax efficiency and general tax considerations, Motleyful wealth management does not and is not permit. to provide any tax or legal advice. Consult with a wealth or tax advisor prior to making any financial decisions. Finally, Motley Fool Wealth 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. So 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.

Starting point is 00:17:35 or maybe some variations, such as, you know, 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. And pretty much any state that has an income tax is going to have a rule to collect non-resident 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 Pittsburgh Steelers. And that is basically

Starting point is 00:18:25 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. And it's not just the athletes, it's the coaches, the trainers, and everyone, right? And so the athletes probably have the money, but not everyone in the team has to do this. So basically, what you're saying is this no longer applies to 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.

Starting point is 00:19:01 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. So each state will calculate their right to tax you based on the proportion that you earned in that state. So just a quick example, if I normally live in Florida 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 work days spent in Virginia, and Virginia can tax 4% of my income. Okay, so that doesn't sound very fun.

Starting point is 00:19:40 Are there ways to sort of 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. I have three top strategies. One is to situate strategically by working from states that do not impose an income tax.

Starting point is 00:20:03 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 their residencies in Nevada and Las Vegas.

Starting point is 00:20:38 I just saw Garth Brooks, whoop, whoop. And 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 Airs 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 kind of 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. is the tax filing threshold in that state. All right. Let's move on to tax myth number two, and that is,

Starting point is 00:21:28 I'm smarter than whatever state you're staying in and their tax department. They can't catch me anyways. Oh, contrary. 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. And so they've developed pretty advanced audit methodologies. And one easy flag in their system is if you're a resident of their state and then you report

Starting point is 00:21:59 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 house forming gift that asks you, 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.

Starting point is 00:22:37 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. Wow. 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 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

Starting point is 00:23:35 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. Yeah. Let's move on to tax myth number three. If my company doesn't report it, I don't need to either.

Starting point is 00:23:57 This is a common myth that if I just get my W2 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, 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.

Starting point is 00:24:33 You would need to consult a lawyer and confirm all of that, but that is what I've seen in practice previously. 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 course. corporate tax filing record, and all of these things are so intertwined and kind of hairy. So if you're traveling all over, I know for accountants in particular who have to go on site

Starting point is 00:25:21 to do audits, those payroll systems are tracking where they are and accumulating a tax in all of the relevant states. Wow. All right. So 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.

Starting point is 00:25:46 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. 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 nomadding 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

Starting point is 00:26:33 the city streets. So, sometimes a change of scenery is all that you really need to re-engage with what you're doing anyway. 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 Rikim Walvi. Thanks for listening. We'll be back tomorrow.

Motley Fool Money - Uber Makes a Profit

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