It's looking like 2019 will bring a swath of unicorns public, including the two ridesharing titans. Which will make it to market first? Does it even matter? What actually sets these two companies apart?
In this episode of MarketFoolery, host Chris Hill and analyst Taylor Muckerman look at what we know so far and what it means for long-term investors who might want to buy into one (or both) ridesharing IPOs. Also, Tivity Health (NASDAQ:TVTY) acquired Nutrisystem (NASDAQ:NTRI) for $1.3 billion, moving the companies' stocks about 30% in opposite directions. What does this do for Tivity in the long run, and why are its investors so displeased with the deal? Also, Taylor shares some highlights from his fellowship trip to New York, where he met with executives from companies like WW (formerly Weight Watchers), Venmo, and more.
A full transcript follows the video.
This video was recorded on Dec. 10, 2018.
Chris Hill: It's Monday, December 10th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, he's been away, but he's back. It's Taylor Muckerman. Good to see you!
Taylor Muckerman: You too, buddy!
Hill: We had a plan. Speaking of Slack, we were Slacking back and forth this morning about, "Let's talk about these things." Then, right before we came into the studio, this happened. Headline newsflash: "Dow sinks 500 points as Britain's Brexit mess fuels investor angst. U.S. markets deepened their losses Monday as Britain's political crisis around Brexit clouded investors' outlook. British Prime Minister Theresa May delayed a key Parliamentary vote on her country's exit from the European Union." Thanks!
Muckerman: [laughs] Yeah, turns out decisions made by the English still impact Americans.
Hill: Yes, they do. You asked me, "Why was the vote delayed?" The only reason votes are ever delayed: because it wasn't going to pass.
Muckerman: They're not going to get what they want.
Hill: Exactly. So, that's happening. Hopefully... [sighs]
Muckerman: You might have to talk about it again tomorrow.
Hill: You know what? It's oddly comforting to know that, when it comes to legislative bodies dealing with the elected leaders of countries, it's not just the U.S. that can get messy now and then.
Alright, let's get to the first thing that we're going to talk about. That's the recent filings of Uber and Lyft to go public. Not just that these are two companies that have routinely showed up on the list of... I mean, pick your list. Most anticipated IPOs, biggest private companies to consider going public. But, they're in the same business. I'm curious how you think about these two. I say they're in the same business, you dig a little deeper, the way that they have set up their businesses, they appear to be going after different things.
Muckerman: It seems like that. When you look at these companies, Uber, the biggest, the first, about 4X the size if you look at employee count worldwide. But its losses in the last quarter were also 4X as large. They reportedly lost $1 billion in the last quarter. Lyft lost about $250 million.
Like you mentioned, Uber, not only is it bigger and older, but it is also trying new things. They purchased a bicycle rideshare company Jump recently. They have Uber Eats, which is a massive network inside of Uber. Also, they're partnering with Toyota, invested $500 million to start putting some Uber driverless technology into their minivans.
A little bit larger than Lyft, but Lyft is following suit nicely. Uber might have had a chance to put the nail in the coffin for Lyft last year, but we all saw the problems that erupted within Uber. Sexual harassment allegations, allegations that they stole IP from Alphabet. Then, other allegations that they were skirting regulators. I think they missed their chance. Lyft was able to raise more money. Now they might go public, they might go public before Uber, raising a significant amount to then broaden their business, potentially. While Uber has the lead in pretty much every category, I think they might have missed their opportunity to really stake their claim as No. 1. Yes, they do have over 60% market share in the U.S. vs. roughly 30% for Lyft. But I think this is going to be an ecosystem, at least domestically, where they both coexist and can start to thrive if they're held more accountable by public shareholders. They've been just burning cash every single quarter with only the private eye watching them.
Hill: Lyft has absolutely taken advantage of the opening that Uber gave them in the wake of the whole Travis Kalanick debacle, in ways that, in a completely different industry, Pizza Hut has not taken advantage of the problems at Papa John's.
Muckerman: Somehow. [laughs]
Hill: Yeah. So, kudos to Lyft for doing that. In terms of, which one is going to go public first, long-term, does that matter? A lot is being made in the financial media of -- and, I understand it, if you're in the business of writing headlines -- the race to go public first. They're two ride-sharing companies. I get it. But I look at it and go, OK. If you put a gun to my head and asked me, "Which one went public first, Dropbox or Box?" I have no idea. I think long-term, it probably doesn't matter all that much. Or, is it something where, yeah, short-term, it doesn't matter, but long-term, it actually does?
Muckerman: Short-term it could, just based on the hype around the IPOs. Maybe people get burned out on the one that comes second if they already spent a ton of their money allocated toward ride-sharing, I guess, however these portfolio managers might look at it. But I can only see this as being an advantage for the company that goes first if it came out of nowhere and the second company was caught completely flat-footed, but they're going to be IPO-ing in a relatively similar timeframe. So, yeah, I don't think that one's going to have a necessary advantage in terms of putting that newfound capital to use in any specific way. You might have a little bit lackluster of ribbon-cutting for the second one, but I don't foresee it being a big deal for investors if you're looking at a multi-year time horizon.
Hill: Have you seen anything thus far that gets you more interested in one over the other?
Muckerman: As a user, I've stuck with Uber for the most part, so I guess my allegiance would be right there. But I think that Lyft has been a little bit more focused. They've kept themselves out of the negative PR circus that Uber has found itself in, and has kind of gotten itself out of, but there's still some overhanging there from public perception, as well as the way that they've treated their drivers. But, whichever company is able to create the better ecosystem for not only its users, but its drivers as well, that one will probably treat investors better in the long run.
Right now, I don't necessarily have a favorite. It just depends on if you want the scale that Uber has. But it's not making more money. The margins aren't significantly better. Operationally, you could go either way.
Hill: To go back to something you said earlier about the pressures of being a public company, because there are significantly more pressures for public companies than private companies, I could see that being ramped up on Uber more so than Lyft -- put aside all the stuff with Kalanick -- simply by virtue of the fact that they're trying so many more things. If both these companies go public, and you're an institutional shareholder putting pressure on Lyft, it's really about operational stuff. With Uber, it's more like, "Look, can you scale back the food delivery stuff and just focus on this?"
Muckerman: Yeah, because they made a huge bet on driverless technology. Maybe that doesn't work out. Maybe they should have just waited and then licensed driverless technology from a Waymo or other companies that are out there excelling way more at this. That's their singular focus in a lot of ways. Hopefully, they can stay on the right track. It appears that they're starting to.
Hill: Merger Monday once again lives up to its name. Today, it's Tivity Health, which is buying Nutrisystem in a deal valued at about $1.3 billion. We've certainly seen this play out before, in terms of, Company A is acquiring Company B. Company B's stock goes up, A's stock goes down. We're seeing that today. Nutrisystem up about 30%. I've never, however, seen this -- Tivity Health shares are down basically the exact percentage that Nutrisystem's are up. People who aren't Nutrisystem shareholders really seem to hate this deal.
Muckerman: The first thing that jumped out at me was the fact that Nutrisystem's margins are about half of what Tivity's are. They're acquiring a business that, yes, it does help diversify the business. Tivity appears to be a little bit more on the health and wellness side, whereas Nutrisystem is on the nutrition side of things, and supplying the food that these folks are going to be eating on their diet. That would be the main reason why I could see this deal being frowned upon by Tivity investors -- they're acquiring a business that is smaller, and margins are about half of what they're currently seeing. So, you can maybe see some dilution there as they start to roll this business in.
Hill: It does seem like, once again, the price tag that's being paid is part of what's driving the distaste for this deal.
Muckerman: Yeah, and reasonably so, potentially. I'm not totally familiar with both of these businesses, but anytime you acquire a business that isn't your core competency and has weaker margins, there's probably less room for some synergies there and cost savings. They did say they expect to save $20-$30 billion over the long-term in this deal, but in the grand scheme of things, they're still acquiring a business that doesn't make as much dollar-for-dollar as their existing business.
Hill: Better brand recognition than Tivity Health.
Muckerman: [laughs] Definitely. I've never heard of Tivity. I've heard of some of the portfolio companies. But, certainly Nutrisystem is a very well-known brand.
Hill: We were talking Nutrisystem. You were just up in New York with a bunch of our Fool colleagues meeting with different companies, one of which was -- I was going to say Weight Watchers, they recently rebranded to WW. Can you share a couple of highlights from your trip? You met with a few different public companies.
Muckerman: We did. WW was one of them, like you mentioned. We met with their chief branding officer, newly hired this year from Unilever, Gail Tifford. They've been a turnaround story, not only in terms of their stock price and their performance over the last several years, beginning with Oprah taking a 10% stake several years ago. She's since whittled that down to 8%. Still, a tidy, tidy return for Oprah on that.
Hill: I'm so glad!
Muckerman: She needed more money.
Hill: I'm so glad something finally worked out for Oprah.
Muckerman: Similar to Tivity with the deal they announced today, WW is moving toward the broad-spectrum health and wellness vs. just diet and nutrition. Tivity is saying, now they're going to be able to focus on calories in and calories out. That's kind of what WW is trying to do, as well. They started to believe that there's a stigma being attached to dieting, and the fact that weight was in their name. So, they want to take a more holistic approach, not just focusing on what people are eating and restricting what people eat, they want to allow people to be a little bit freer in their diet, but help them find ways to exercise, live with a clear mind. Whole-spectrum, holistic approach to health. You can start to see the buy-in throughout the company.
I think diversifying themselves that way might help bring in different demographics. Traditionally, they've had 90% women for their subscription base. They're trying to attract more than just 10% of men. They're using some app-based games for their dieting system that they hope can achieve that in the long run.
Hill: Nice. I'm particularly curious about your meeting with Venmo, since I am a PayPal (NASDAQ:PYPL) shareholder, and a Venmo user.
Muckerman: We were fortunate enough to meet with their COO, Mike Vaughan. I believe he said he was Venmo user No. 13, one of the first 10 employees. Started in Philadelphia, then moved to New York when they needed some funding, and have since been bought by PayPal several years ago. Still kind of operating as their own business unit, leveraging some of the strengths that PayPal brings to the table but still just the Venmo business, and running it as such. A lot of people believe that it's a social feed for making payments, but that's really not what they're about. They've sent a lot of their technology up the chain toward PayPal with their one click, which was their idea inside of the company. It's quickly become the most highly demanded feature in PayPal. Sharing that knowledge back and forth between the acquired business and the acquiree, exciting to see.
That team is just revved up. They're starting to monetize their user base at an incredible rate. I think that's one of the gems in the PayPal business if you're an investor.
Hill: It's incredibly easy to use.
Muckerman: It is. That's the main thing. They talked about all the things that they could add, but it would just result in bloat on the app. The main reason why people use it isn't the social feed, it's just how freakin' easy it is.
Hill: Yeah, I didn't even realize it had a social feed when I first started using it. And then I was like, "Oh, OK. I don't need to share all this information with the public."
Muckerman: No, you don't.
Hill: To me, Venmo is a great lesson for so many different businesses in so many different industries, just how important ease of use is right out of the gate. The easier something is to use, the bigger your addressable market is.
Muckerman: You connect your bank account or a credit card, and it's so easy. They're getting into physical payments with the debit card, so you can treat it like a checking account if you want. The ease of use, and to see how that team is just so fired up, still to this day, and growing very rapidly, monetizing about a quarter of their members already, and they've just really started trying to monetize people. Like I said, billions of dollars of opportunity here within this small, growing business within PayPal.
Hill: Last one before I let you go. 2U (NASDAQ:TWOU)? You met with 2U?
Muckerman: Very interesting company, a recommendation here at The Fool. Not one that I had done too much research on myself until this fellowship trip had been established.
Hill: Remind me of their business again?
Muckerman: Revolutionizing online education. Basically, they're trying to make online education suck less, is what their CTO said to us.
Hill: [laughs] Please tell me that's on a wall somewhere at the 2U offices.
Muckerman: It might be. We didn't get the full tour, but they have an office very much like ours -- food everywhere, coffee, people engaged in conversation right and left, focus on wellness. Over 400 courses this year they've offered online, with major universities all around the world. They actually got approved for the first online J.D. with Syracuse University. If you've been wanting to get your online law degree and you don't want to move to Syracuse from your beachside condo in Santa Barbara or San Diego, you can get that degree now from Syracuse in the comfort of your own home.
Hill: I've never been to Syracuse. Let me preface this by saying I've never been to Syracuse. I've seen pictures. It seems lovely in the summer.
Muckerman: It is! I've been there during the summer, I can tell you.
Hill: This is not the time of year you want to be in Syracuse, New York.
Muckerman: [laughs] It's bearing down with the cold and the snow. Utilize those tunnels if you live up there.
Hill: Taylor Muckerman, thanks for being here!
Muckerman: Appreciate it. Thank you!
Hill: As always, people on the program -- oh, you know what? Before we go, I have to say a quick thanks to one of the dozens of listeners, Joe Walsh. He sent me a CD, and he signed his note, "Joe Walsh [not that Joe Walsh]." Because if you get a CD from Joe Walsh, you might think, "Maybe it's that one." He put together a CD of holiday music. Thank you to Joe for that! One of the things that's on here is Bob and Doug McKenzie's 12 Days of Christmas, which I took as an opportunity to introduce my 13-year-old son to Bob and Doug McKenzie, and he was laughing his head off. The eternal appeal of Bob and Doug McKenzie.
This also gives me the opportunity to remind people that, yeah, all month on MarketFoolery, producer Dan Boyd is making your holiday musical life better by giving you hidden gems in the holiday music universe. That's that.
Muckerman: Love it!
Hill: 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. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
[8 Days [of Hanukkah] by Sharon Jones & the Dap-Kings]
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Chris Hill owns shares of PayPal Holdings. Taylor Muckerman owns shares of GOOG and PayPal Holdings. The Motley Fool owns shares of and recommends 2U, GOOGL, GOOG, and PayPal Holdings. The Motley Fool owns shares of BOX and has the following options: short January 2019 $82 calls on PayPal Holdings. The Motley Fool has a disclosure policy.