Uber and Lyft Still Have Problems

In this episode of MarketFoolery, host Chris Hill talks with The Motley Fool's Jason Moser about some market news. Big Oil stocks popped on news of an attack on Saudi Arabia's oil industry. Jason explains why investing in energy is so tricky and name-drops one company that would benefit big from more expensive oil prices. Uber (UBER -2.94%) and Lyft (LYFT -3.35%) both popped on an upgrade from HSBC (HSBC 0.32%), but some among us remain unconvinced. Accenture (ACN 0.28%) reported that big banks might be leaving $280 billion in payments revenue on the table in the next few years. Jason puts on his Industry Focus: Financials host hat and explains why that is, who stands to benefit from big industry changes, and more.

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This video was recorded on Sept. 16, 2019.

Chris Hill: It's Monday, Sept. 16. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio today, the one and only Jason Moser. Thanks for being here!

Jason Moser: Howdy! 

Hill: We're going to talk ridesharing. We're going to talk global payments. We're going to start with oil. I hope you filled up your car over the weekend.

Moser: I did, actually.

Hill: ExxonMobil, Chevron, BP, Royal Dutch Shell -- all of those stocks are on the rise this morning. That's because oil prices are on the rise. This is after a coordinated attack hit Saudi Arabia's oil industry over the weekend, forcing Saudi Arabia to cut its oil output by half. If I'm doing the math right, that ends up being about 5% of global production. Look, if you already own any one of these oil stocks, you're having a good day. How do you think about this story, in terms of both the short term and the long term?

Moser: I will say, first and foremost -- let double check this in my mind real quick -- I don't believe I have any direct ownership in any oil stocks. We've talked a lot on these shows about what makes investing in oil so difficult -- it's just a straight-up commodity. Obviously, a commodity that is very important to making the world go around in this day and age, but it's a commodity, nonetheless. It seems like it's always beholden to particular ebbs and flows and supply and demand. If you're really going to get the opportunity to make some money investing in energy, then you need to be able to depend on some sort of geopolitical event, or something happening that you almost really can't predict, other than, you can just say, "Well, at some point down the line, there's going to be a geopolitical event that occurs that is going to make oil go up for whatever reason." We've been kind of calling for this for a while now, and it hasn't happened. Oil prices have been very depressed going back all the way to 2014. If you look at the stock charts of a lot of these big familiar names in the industry, whether it's Exxon, those shares are down over the last five years; Chevron essentially flat; Halliburton down as well; even though they're up a little bit today. That really is because, as the commodity prices stay low, well, that limits the profitability these companies can wring out. So I think that's what makes investing in oil so difficult. It is a bit more short-term in nature. I think it's a bit more value-focused. You need to be able to identify a price in which you're happy to get out and just claim some profits. It's not to say that you can't make money doing it. But that's generally how I view investing in it, which is why I really kind of don't.

Hill: Do you have any exposure to energy in your portfolio? I'm always reminded, anytime energy comes up of something Ron Gross said to me years ago, which was, when he was running the Million Dollar Portfolio service, he looked and thought, "There's no energy exposure in here. It's a massive industry. I want to get together with my team and figure out a way to get some type of exposure, even if it's not directly in oil producers."

Moser: I guess the most direct exposure I have to energy would be probably something like Amazon, with the investments that it makes in wind energy and whatnot. I don't own any Tesla. 

Hill: That's a couple of steps away.

Moser: Yeah, exactly. Indirect is the best I can possibly give you right now. It's not to say that I don't think there's opportunity there. But, frankly, I've never been attracted to the solar industry. The one company where I thought perhaps it could pique my interest, Solar City, well, we know how that turned out, Chris. That's, if anything, made me a little bit more skeptical of the economics of the industry in general.

But I do think, when you look at the way that oil moves around the world, some very interesting numbers to take note of here. The 15 countries that imported the highest dollar value worth of crude oil during 2018, so the companies that are bringing the most oil in -- China at No. 1; United States at No. 2; India at No. 3; Japan at No. 4; South Korea at No. 5. Now, if you look at the top 15 suppliers from which the U.S. imported the highest dollar value worth of oil -- in other words, where do we get all of our oil here? -- Canada is No. 1; Saudi Arabia is No. 2; Mexico is No. 3. Now, you'll see that Saudi Arabia name across a lot of countries there. A lot of countries get a lot of their oil from Saudi Arabia, which is why, when you see something like this happen, you see such a knee jerk reaction. 

One company I used to own, I don't own it anymore, but I was very interested to see how the stock would react today, was Clean Energy Fuels. Clean Energy Fuels is in natural gas. Essentially natural gas for fleets and trucks and whatnot. They've had a pretty tough go of it just because of the price of oil. They really need to see the price of a barrel of oil at $70 and higher for that value proposition to work out for their business model. As oil prices stay low, you have less incentive to switch over to natural gas. As good-hearted as people think they are, economics at the end of the day rule, regardless of what you may think about the environmental impacts. Clean Energy Fuels, up 8% today on this news. Not surprising at all because now, that value proposition becomes a little bit more apparent. That's a business that's had a lot of headwinds here lately. But if we do see the cost of oil start to creep up, and maintain higher levels here going forward, Clean Energy could be a company that stands to benefit a little bit here. Don't let that $2.30 stock price fool you. 

Hill: On a day when the market in general is slightly in the red, shares of both Uber and Lyft are up 4% to 5%. This appears to be due entirely to an upgrade from HSBC. I'll just quote directly from the upgrade, HSBC writing, "We think regulatory concerns are priced in, while we continue to see a lot of optionality around product improvements for both Uber and Lyft." Do you agree with that?

Moser: I don't think that regulatory concerns are necessarily priced in. 

Hill: Sorry to cut you off, that was the first thing I thought! I was like, "Really?"

Moser: Maybe they know something that we don't? Regulatory concerns, one of the big ones out there is what California is doing with this gig economy bill. The economics of businesses like Uber and Lyft, the story for the longest time -- we've been looking at these businesses, thinking, "Well, they're able to keep leaner cost structures, because the drivers are contractors, not full-time employees." They're not spending as much in maintaining that employee base as a company like us here at The Motley Fool. We have as many employees as we have, and we're paying for healthcare, retirement, all this good stuff. Lyft and Uber and other businesses like that are able to maintain leaner cost structures because of that contractor status. How that exactly shakes out, to me, seems very nebulous at this point. It does sound like California's going to sign that bill in the law. And it does sound like Uber and Lyft and other companies are really fighting to have their businesses exempt from that law on a permanent basis. I have no insight as to whether they'll actually be able to pull that off. I can tell you, if they don't pull it off, the cost of running their businesses will become a lot more prohibitive. It'll be a lot more difficult for them to achieve profitability, which really then goes to the idea of, what do they do with the networks? Beyond just the economics of the business, it's the optionality. Now, I agree that the optionality is there. There's all sorts of neat things they can do with those businesses. They're in the middle of trying to do them, though. A lot is yet to be written. Man, it just seems to me to maybe be a little bit overconfident there. Maybe they know something I don't.

Hill: Part of this upgrade was talking about, in terms of what it means for shares of Uber and Lyft, they're talking about upside of 30% to 35%. What you were just saying reminded me a little bit of the conversation we had on Motley Fool Money last Friday, when we were talking about the We Company, and how they updated their S-1 filing, mainly around the corporate governance statutes. The point that you and Andy Cross and Ron Gross all made essentially was, "That's fine, but you still have the underlying business."

Moser: Business model still sucks.

Hill: I just looked at this and thought, yeah, they do have the optionality, but, to your point, some of that is in motion right now, and it'd be one thing if the underlying business was this money machine, but at the moment, it's really not.

Moser: No. I think that with companies like Uber and Lyft, the one thing that they've done early on, which I think is working in their favor -- and it's kind of what Amazon did for consumers early on. Essentially, it's not as much about low prices. It's more about good prices, and a convenient experience, in being able to order something and having it delivered to your doorstep in X number of days. The customer has been trained at this point to value convenience a little bit differently, perhaps, than we used to. We used to not really have a lot of options. We had to get in our car and go somewhere to go get something. Now, you have a lot of different ways that you can get your stuff. It makes us value our time differently. So, I think that what Lyft and Uber have done early on, it was less about this, "Wow, I can get a Lyft and an Uber and pay $10 less than I would pay for a cab." It's always really been about, how easy is it to do it? And you can do it anywhere, you just click a couple of buttons on your phone there, boom, a ride shows up. 

It's all to say that, down the road, I think both of these companies have a lot of room to raise prices. Strategically, methodically, not all at once. But I think over time, they'll be able to raise prices because we've come to really love the value proposition that they offer. The simplicity, the convenience. It really is nice. Now, if we are able at some point to see self-driving cars take a bigger share on the road, these companies should be able to monetize that. Certainly, Uber is doing a very good job monetizing the Eats business, or at least growing that business. They reported last quarter gross bookings of $3.4 billion, just for the Eats business alone. That was up almost 100%. And they've got 315,000 restaurants on board with that platform now. As time goes on, I feel like we're moving more toward people ordering food as opposed to preparing it at home. So, I think that's something that they'll be able to really fire in on as well. 

It's interesting to see how the market values these stocks. Lyft and Uber in that 4X sales range. The market is looking at both and thinking of all prospects. They're not giving the edge to one or the other, though. At this stage, you probably have to look at Uber and think the scale alone gives them a little bit more wiggle room there. 

But yeah, the upgrade, 35% upside, that's not how we really do things here. We're not looking for that 35% upside, and then let's sell and go do something else. We're looking at these businesses and thinking, are these businesses we want to own for long periods of time? From that perspective, I could see owning Uber or Lyft, or a basket of the two, and thinking it's a five-year to 10-year play. But, I do like the trends. There's that.

Hill: I know you are digging into this next story on Industry Focus later today, but I did want to touch on it just briefly. Accenture has published a report that, on the surface, does not appear to be great news for the banking industry. The headline of the report is Banks Risk Losing $280 Billion in Payments Revenue by 2025. That's somewhere in the neighborhood of 15% of payments revenue. I'm sure the big banks would like to have that $280 billion, but right now, it looks like the beneficiaries are going to be businesses like PayPal and Square. 

Moser: Yeah. It's a very big market out there to grab, as far as the market of money moving around the world. We talk about it often. Big banks are big because they've been able to take advantage, for the longest time, of being the only game in town. For a really long time, they've been the ones pulling the strings. To put a little context around that, I remember back in 2001, when I was working at Bank of America as a loan officer -- we would help people with account management and whatnot. It struck me that anytime I ever saw someone coming in with business service needs -- like, they had a business and they needed to be able to accept credit cards -- that was immediately something that we'd refer over to our merchant services side of the business. And it always struck me that the merchant services side of the business was so clunky and cumbersome. And yet, it seemed like the bank made a killing on it because it really was the only game in town. You fast forward to today, and certainly, technology has changed everything for the better. 

It's certainly understandable why the big banks are thinking, "Oh, my God, we've got to protect our interests here." It does sound like they are in a little bit of a bind there. You've got the Fed looking to create their own system to disrupt the Automatic Clearing House to make transfers even faster. The big banks are trying to fight the Fed on that. The small banks are in favor because it makes them more competitive. A lot of things that play here because there's a lot of money to be had. 

By the same token, one of the things that you see in that report is -- you're talking about this payments industry, and essentially, payments are being whittled down to free. We've talked a lot about that. The payments industry, one of the competitive advantages for a company like Square or PayPal, they're going in there and charging next to nothing for these transfers. You ask yourself, "how can they do that and still be a good business?" Well, ideally, you build an ecosystem, so to speak. You build out more services so that you're not just a payments transaction business. You look at something like Square. That's the importance of a two-sided network, both the buyers and the sellers. They're providing software, hardware, services for their sellers to be able to open up shop. They have the Cash app that is helping buyers do more things with their money from a mobile perspective. They've got Square Capital, which is in the lending side of the equation there. You've got Square dabbling on the brokerage side now, making some early bets with Bitcoin. It's all to say that these smaller, more nimble tech companies like Square and PayPal have a lot of upside there because they're figuring out new ways to do things in a market where very few players held so much of the sway for so long.

Hill: If you're not already listening to Industry Focus, there's a good opportunity to check out today's episode. It's free to subscribe. Just one click of a button. Jason Moser, always good talking to you!

Moser: Thank you, sir!

Hill: 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. That does it for this edition of MarketFoolery! This show's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!