On this week's episode of Industry Focus: Consumer Goods, host Jason Moser, together with Motley Fool analysts Emily Flippen and Joey Solitro, look at three international stocks you might want to dig into. First, they explain what happened with Uxin's (UXIN 13.38%) short report drama, and how it reflects on the company's long-term picture. Then, a dive into Jumia (JMIA 2.51%), an immensely exciting and recently public company that's been called the Amazon (AMZN 2.14%) of Africa. Jumia is a mix of e-commerce, travel, deals, and more, but investors should know the risks before diving in. Plus, the hosts look at the current state of NIO (NIO 6.60%), a Chinese luxury electric car manufacturer that is quickly gaining steam. Tune in to hear more.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
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This video was recorded on April 30, 2019.
Jason Moser: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market each day. It's Tuesday, April 30th. I'm your host, Jason Moser, and joining me in the studio today, from Stock Advisor and Rule Breakers, Emily Flippen; and from Motley Fool Canada, Joey Solitro. Guys, how's it going?
Emily Flippen: Doing well!
Moser: Thanks for being here! On today's Consumer Goods show, we're going to take a look at what just could be the MercadoLibre of Africa. We'll take a listener question about a Chinese electric car company, NIO. But first, we're going to take a look at the current state of affairs for Uxin, the popular used car e-commerce platform in China. Emily, I'm going to start with you here because you're really the resident expert when it comes to Uxin.
Flippen: Oh, no!
Moser: We had demand on Twitter for your take on the company here recently. I wanted to get an update on the company, knowing that you follow it. There was a recent short report that came out that played out a little bit on the stock. But knowing that we're business-focused investors, we look past those types of things into the longer term there. What is the state of affairs with the Uxin? How do you feel about the company today?
Flippen: It's really quite the interesting story for Uxin. We had this short report come out. Sent the stock down, I think at its bottom was down 50% in a matter of hours after this report came out, essentially claiming that the majority of Uxin's business, which is to sell used cars -- they run a used car e-commerce platform in China -- was fraudulent, and that the company was essentially double-counting, making up a lot of their numbers, lying to investors in their annual report. Some very egregious claims there that, if they were accurate, would drastically change the value proposition of Uxin. And it's interesting, because it came out right after an amazing quarterly report. We saw Uxin absolutely crush expectations. The stock is still depressed from the short report. So, you're right, we are business-focused people, but we can't take this without looking at what it means for the business. Investors who maybe are wondering why, if they own shares of Uxin, why they're down a lot; or they're looking at the company, why it looks so depressed, that's really the reason.
I know I looked at it. I know Joey's looked at the report. Some things are concerning. You're never going to know these companies the same way that you may know a company that's based here in the U.S. But, there were a lot of red flags for me in the short report coming out that gave me the impression that the people who wrote it didn't really understand Uxin's business.
Moser: So, red flags in the short report, not red flags for the business.
Flippen: Green flags for the company, essentially. Some stuff to merit that. Very clearly, part of the business strategy for the company, whoever was writing it was unclear about the strategy that Uxin was taking. Without getting into the granularity of it, for me, I still want to hold out for this company. It'll be interesting to see what happens when they start to report in the future quarters. 2019 is going to be an interesting year for Chinese economic development. But the numbers that we've seen come out, to the extent that they're true, are extremely promising. And it's still an extremely promising company.
Moser: We talk about this a lot -- Joey, I'll let you chime in here. You and I sit next to each other, we were talking about that short report when it first came out. This is not the first time we've seen a short report come out from an entity, and invariably, these entities are always holding a short position in the stock on which they're reporting.
It's really easy to look at a business from a 50,000-foot view and say, "We like the business. We like what they're doing. We like leadership, the services they're providing, the products they're selling." It's also pretty easy for anyone to go in there and start trying to pull on a string here or there, dispute a fact or a number or something, and turn essentially what is a molehill into a mountain, right?
Joey Solitro: Absolutely. Using an example from the report would be, they try to say that they count inventory twice, and there might be a different price tag on those two cars and it's the same exact image. But if you look at it from the company's standpoint, of course it's going to be a different price for a car depending on how far it has to travel. They serve 300 markets directly and 900 markets in total using all of their dealer partners. So of course, if someone goes directly to that dealer, they might get one price; but if they're going directly to Uxin's website, it might be another price, because they have to factor in that commission.
I always like to take the short report with a grain of salt, like you mentioned, because they profit from that stock going down. They're going to do anything -- even the wording that they use is like, "We can't trust anything these guys say because of this, this and this." But if you look at it from a different angle, or a more positive angle, you could say, they just don't understand how this works. So I'm with Emily. I have a different understanding of the business, and I am long the stock. So, of course, I see through a lot of the nonsense. But if you're new to this company, you might have completely written off from ever wanting to own it just because you might believe something that this company said, or it might have scared you away, and you were selling as the stock was down in the mid-40s -- err, the mid-140s.
Flippen: [laughs] Mid 40s! Uxin dreams!
Moser: Well, if you think about it, if you're taking the long view on a company -- that's generally what we do here. We don't really do a whole heck of a lot of shorting. A short report, they're really just looking for that one day. They want to make the impact as quickly as possible. For them, it can literally be a one-day investment. They're in there, they're out of there. It's obviously much less business-focused. And to your point, I don't like to just dismiss these reports, saying, "Oh, they just don't know what they're talking about." They're no dummies. There are always things worth paying attention to. By the same token, again, they can pull on any string there. Companies are big entities. There's a lot of things going on. Reporting errors happen. Numbers get fudged, whatever. It doesn't necessarily mean that the entire company is a fraud, or it's going down the tubes. To y'all's point, taking those things with a grain of salt. But from what I'm gathering here, you both feel like it's still a business that's doing a lot of the right things.
Flippen: Definitely. Just to use another example from the short report, they said one of the problems with the company is the fact that cars that are listed for sale on their website are also listed for sale at dealerships. Yes. That is how used car sales work. [laughs] It's funny because Uxin's management responded, wrote out a really nice response, actually, that if investors are worried, they should take the time to read through. They said it in a nicer manner than I probably would have, if I was Uxin's management. It was essentially like, "Yes. These are our business practices. This is how selling used cars works. We never claimed to have exclusive rights over the cars that dealers listed on our website."
All in all, it doesn't look great for the stock. But I like to go back to the quarterly report that they just released, the fundamentals of the business, management -- all these things are still looking promising. You definitely have to take a long view.
Moser: Well, that's encouraging. We'll continue to follow it. I'm sure that we will be inviting you both back in the studio again very soon to talk about this company.
Flippen: Hopefully for better news!
Moser: Yes, for better news. Let's take a step over to Africa. I tell you, Joey, we were talking about this a few days ago. You had me at MercadoLibre when you were talking about Jumia Technologies. This essentially being the MercadoLibre/ Amazon/ insert tech name of Africa. This seems like a pretty compelling business from a market opportunity standpoint. We've seen obviously what Amazon has done to date. We've seen how MercadoLibre capitalized that on its own particular geography there in Latin America. Looking at Africa, understanding that they're still a little bit behind in many ways, and they are coming into the 21st century in a number of ways, it sounds like Jumia is trying to capitalize on that by building out ultimately an e-commerce style platform for what looks like ultimately the entire continent, right?
Solitro: Absolutely. A lot of people like to attach Amazon or Alibaba to the company, the ____ of Africa. Here at The Motley Fool, we're all familiar with MercadoLibre. I think that best sums up what they do. They have these three business divisions where they split up between marketplace, payments, and logistics. But when you dig deeper, it's much more than just that platform that's connecting sellers with buyers. They've got the travel division that looks very much like a Priceline or an Expedia. They've got the foods division, that looks very much like a Grubhub or Instacart. And they've got this deals division, which is a mix of real estate, cars, jobs and classifieds, which reminds me of a combination of Zillow, cars.com, Indeed, and Craigslist. You see that they're basically leveraging every popular form that people use to purchase things on the internet and bundle it all into one. Each of these business divisions actually had different names. I think the travel was Jovago, and Carmoto was the car division. So they just rebranded these as Jumia Deals or Jumia Travel, and they just bundled it all into this one company where the most interesting part is that it's Africa, and the second fastest growing economy behind East Asia. You've got 1.2 billion people and the population is supposed to double to 2.5 billion by 2050. You've pretty much got this ultimate platform of growth, and they've got that first mover advantage in all these industries.
Moser: Yeah. We talk about MercadoLibre, and a crux of that thesis early on was not only the size of the Latin American population and the market they were serving, but the emergence of this middle class. I think we're very used to seeing that middle class day in and day out here in the States. I mean, that's kind of just normal everyday life for us. But when you look at some of these other places where the middle class is really just starting to develop, Latin America is certainly one of those and MercadoLibre's capitalizing on that. It sounds like Africa is probably a little bit behind that. But beyond even just the population expanding and technology spreading, I mean, this is going to be at some point, a middle class that jumps up out of nowhere, and could serve as a really nice catalyst for this business.
Solitro: They actually put that in their S-1 filing, which is very interesting. Yes, they have this population just explode. The median age right now is 19.4. You're talking millennial consumers, or Gen Z consumers, Africa is just going to be the ultimate go-to. And by 2032, they list 1.1 billion people of working age, actively in the labor market. So, yeah, when you talk about how you still need to educate a lot of consumers on how to use e-commerce, ordering online, getting them set up with the payments platform to be able to pay with credit cards, since it's still a lot of cash transactions over there. There will be a lot of education and learning curve in Africa. But I feel like they're on the right path and partnering with the right companies such as Mastercard, to actually help expedite this growth.
Moser: As a shareholder of Mastercard, I appreciate you saying that. This is a relatively new IPO. It looks like it just IPO-ed earlier this year. Typically with new IPOs, we recommend taking a patient view, letting them report a couple of quarters. Get an idea of how management is viewing the business, how they run the business, how they communicate with shareholders. By the same token, when you see opportunities like this, it can always be worth maybe a little nibble. I mean, I always look at these businesses and say, if this business that I'm looking at checks all the boxes, and the only thing I'm really hesitant on is the price, normally I'll go ahead and take a small position just to get a little skin in the game and start following the business. I recently did that with Eventbrite, as a matter of fact, another company you and I like.
Jumia, I could see that being the case as well. There are a lot of risks involved here. Talk about a couple of them for us.
Solitro: When it comes to risk, this company's losing a lot of money right now. They're going to have to spend to grow. But when I look at it, I always like to weigh the opportunities against the risks. It comes public around $2 billion, I think it's sitting at a $3.6 billion valuation today. And yes, that's very pricey for the $150 million U.S. dollars that they're doing in sales. But I always like to take a step back and see the size of the market today, where the market's going in the future, and saying that $3 billion market cap today isn't all that much for what this company could be in the future. Had you done the same with a MercadoLibre or an Amazon in the early days, like we did here at The Motley Fool, you can see the similarities among these companies. I know I'm kind of an IPO junkie. I buy a lot on day one, and I get a lot of crap for it. But with certain companies, I want my skin in the game on day one. And I think with Jumia, I came in with 75% of the initial position that I wanted to so I could add to that position if it starts off with that mid-morning pop then comes back down over the next couple of days. But it's just taken off like a rocket ship.
Moser: Another thing I think about too, having followed Amazon and MercadoLibre, and perhaps either one of you, I don't know if you've seen this, but I have not seen really mention of Africa, that market, in any of these companies' earnings calls or presentations. I mean, I can't recall off the top my head any businesses out there that are really focusing in on this particular market. Do you?
Flippen: No. And it's not to say that Africa isn't going to be a potential huge market. But it is to say that there's a reason why they're not in that market right now. There's a reason why they haven't spent the money to invest in that market. It's because it's an extremely challenging market to penetrate. You're not just talking about geopolitical turmoil. We see that all over with South America, people are still investing there. What you see is just the fact that the infrastructure that's needed for a lot of these companies has not been invested in. And unfortunately, a lot of that infrastructure requires governments to spend the money to invest. That's not to say that it won't get there. I think there's value in getting in early, especially if you have a long-term time horizon, because you don't really care. You don't care what's going to happen one year, two year. Over the long term, you know that a large e-commerce dealer in Africa is going to be bigger than $3 billion, for instance. But it is to say that there is extreme concern over how long that development is going to take, and the money that is going to be needed to build it out. So, my concern with a company like Jumia is just the fact, like Joey mentioned, it's unprofitable. They're going to need to continue to sustain themselves, whether that be through capital raises or shareholder dilution, until they're able to scale to the point where they're profitable.
I've been burned in emerging markets before. I imagine it will not be my last time I am burned in an emerging market. But for this one, I think there's value in maybe just waiting a little bit.
Moser: As compelling as the story is, I always make sure to remind myself not to fall in love with a story and look at the underlying business and the fundamentals. But I have to admit, I don't mind buying a stock and hanging on to it for 10 years. I can click ignore and just get on with life. A lot of people that thought MercadoLibre would never be a $3 billion business and look where it is today.
Flippen: MercadoLibre is a great example of a company that I probably would have said the same thing about if you had asked me when they first went public. And I would have been burned on it.
Moser: There were some people here that said it, and consequently they didn't invest. Maybe Jumia is that story all over again. Definitely one we'll keep an eye on. Joey, we'll be having you back in here periodically to keep us up to date with the company.
OK, let's wrap everything up here. We have a question on Twitter from Kurt Adams. Kurt tweeted some really kind words the other day about our shows and the podcasts and how we're helping out. Kurt, we wanted to return the favor for you make sure to get this question in the spotlight for you. Kurt asks, "I heard you'll be hosting next week's Industry Focus. Could you please also comment or update on NIO? I own some shares and was wondering if this is a value trap or a value investment? Thank you." Kurt, you're in luck, buddy, because we have two people in this room, not including me, who know this company pretty well. Emily, I'm going to start with you. NIO is the Chinese electric car company. Correct?
Flippen: It is correct. A lot of people call it the Tesla of China.
Moser: OK. I did a little research on this company to get educated on it and understand where they stand. That really was the first question that came to mind. This does seem like a Tesla for China. Why wouldn't I just invest in Tesla? But, let's --
Flippen: [laughs] Let's not go down that rabbit hole.
Moser: Let's go back a little bit first and foremost and get your take on the company and see if we can't help Kurt out here.
Flippen: NIO is a recent IPO. It's a large premium electric vehicle maker in China. They're known for taking a different approach to the way that they produce and sell electric cars vs. a company like Tesla. Tesla obviously recharges their batteries. NIO replaces their batteries.
Moser: Oh, wow! OK.
Flippen: So, they don't have the same distance. You don't really need the same distance, at least for their premium target market. But it's actually cheaper for them just to replace your battery than it is for them to build the infrastructure and make charging ports reliable. Whether or not that changes in the future, to be seen. Personally for me and Joey -- and I know, after having many conversations with Joey about not just NIO, but Chinese stocks in general -- [who] has a very different opinion, so it's almost unfortunate I'm talking first. I tend to be a little bit nervous. This is coming from the girl who likes the Chinese used car dealer that's a much smaller, also unprofitable. But electric cars in general, it's a soft market right now in China. They've guided, at least over the next couple of quarters, that sales are not going to be what they want them to be. That's not to say that long-term, it won't be there. But I know how much these cars cost. We talked about an emerging middle class. When I think about the middle class in China, I think that something like a used vehicle -- having just had the ability to purchase, by the way; regulations lifted, so they have the ability to purchase used cars -- in my mind, over the next five to 10 years, that's probably going to be the bigger market as opposed to electric vehicles.
However, grain of salt. Obviously, electric vehicles are something that's important to the government. It's efficient, economical. And NIO is a big name for China. I imagine there's a lot of money invested in the performance of that company.
Personally, they're just horribly unprofitable, and I don't see a lot of demand, so I stay away from it.
Moser: Well, I did notice, in the most recent call that the current quarter, and it looks like perhaps next quarter, sales are going to decelerate a little bit. I mean, that's understandable. They're cars; you're not going to just buy a new car every year, every quarter. But by the same token, this is really purely a China play, right, Joey? They're selling their cars only in China, right?
Solitro: Yeah. With Uxin and NIO -- I own both -- it's a play on both sides of the market. You've got Uxin, where it's the used car, it could be the lower-income families or the middle class that just want to get a car in their household. NIO is more of that premium luxury, but affordable in comparison to Tesla. So, I've got exposure to the premium autos and the used autos. Because, again, I'm the type of investor where I take a step back and I think where this market will be in 10 to 25 years. The Chinese auto market is still one of the most attractive in the world. Owning a car in the United States is almost like a second thought. Everybody has one. In China, it's not there yet. So I see it as, autos in general are great investments in China. But then, when I pick and choose, I like Uxin because it's got this e-commerce platform. With NIO, they've got this phenomenal product that is just as good, if not better than Tesla, at a better price point. Plus, you have that added, it's made in China. Kind of like we love Made in America, they must like Made in China -- I'm not going to make assumptions. But I would assume that having that local brand that's actually manufactured right there in their home country would be more attractive to them.
Moser: This is a new IPO, it's worth mentioning. It's really still pretty new to the public markets. I did see, the founder and CEO Li Bin. He owns 14% of the company. I also noticed there are three share classes, so ultimately, shareholders like us would just be along for the ride. You're getting that American depository receipt, which would represent an A share that gives you one vote; the B shares get four votes, the C shares get eight. That's not the first company that to do that. We have plenty of multi-class share structures out there. But it is Li Bin like the Elon Musk of China? Is he that impressive and perhaps sometimes a little over-the-top? Or is he more of a keep quiet, stay under the radar and let your product do the talking?
Flippen: I think Richard Liu probably has that kind of impression now, more than Li Bin does. I wouldn't say that he is Elon Musk-esque. I'd actually probably still say that Tesla has arguably the better brand name reputation, just because it is a foreign brand and it's kind of pricey, the same way Starbucks has that nice premium coffee brand in China. Tesla has a nice premium electric car brand in China. I'm not sure how long that's going to be there, NIO is really making them run for their money. But I don't think I would call him Elon Musk, no. [laughs]
Solitro: And that's almost a good thing. This might be the first time a lot of people are hearing the CEO's name, while Elon Musk is almost a household name, and lately not for good reasons. And you see a lot of negative things about JD.com's CEO. For him to basically just be going to work every day, and he hasn't given me a reason to not want him to have control of the company, so until that day comes, it's not really cause for concern for me. But that's just my two cents when it comes to CEOs.
Moser: Alright, we'll leave it there. Kurt, we hope that was helpful. Emily, Joey, thanks so much for stopping by!
Solitro: Thanks for having us!
Flippen: Thanks for having us!
Moser: 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. Today's show was produced by Austin Morgan. For Emily Flippen and Joey Solitro. I'm Jason Moser. Thanks for listening! And we'll see you next week!