Nobel Prizes, PayPal Investments, and Max Delays

The Nobel Prize in chemistry generates some electricity. American Airlines (AAL -2.18%) deals with turbulence over the 737 Max. And PayPal (PYPL 0.64%) writes down an Uber (UBER -2.03%) investment. Motley Fool analysts Emily Flippen and Jim Mueller discuss those stories and debate the merits of no-frills airlines.

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This video was recorded on Oct. 9, 2019.

Mac Greer: It's Wednesday, Oct. 9. Welcome to MarketFoolery! I'm Mac Greer, and I am joined in studio by Motley Fool analysts Emily Flippen and Jim Mueller. How are we doing today? 

Emily Flippen: All right!

Jim Mueller: Hey, Mac! Doing great!

Greer: Good! We've got lots to talk about. We're going to talk some PayPal and Uber. We're also going to go to The Fool labs to talk Nobel Prize winners. I'm not sure we've ever talked about the Nobel Prize, at least on MarketFoolerys I've hosted.

Mueller: We should!

Greer: We should, and we're going to. It has some business implications. I don't want to give it away. We're going to be talking some Nobel Prize. 

But let's begin with the airlines, American Airlines. News that American has pulled the Boeing 737 Max from its schedule until mid-January. Now, Emily, the 737 Max has been removed from all airline schedules, has not been allowed to fly since mid-March. That part isn't news. The news is that it's going to be until mid-January for American; Southwest won't be flying the 737 Max until Jan. 5; United until Dec. 19. What do you make of the American news and the 737 Max?

Flippen: This means for American Airlines that they're going to be having to cancel about 140 flights a day on average. It's definitely financially impacting the company. This is par for the course, as you've been seeing right now, but American Airlines really can't afford this type of setback. Its biggest competitor right now actually seems to be Delta. The fact is, Delta didn't have a single Boeing 737 Max in their fleet when this happened, so Delta has been picking up a lot of slack from these airlines while they've been canceling all these slides. It's adding a little bit of salt to the wound here. Just a couple of days ago, Delta actually closed on its $2 billion deal with LATAM Airlines, the largest Latin American airline, giving them a 20% stake in the business in a highly coveted spot in these growing countries like Brazil, Argentina, Chile. American Airlines previously had a partnership with LATAM for those areas. It's one step back after another for American Airlines right now.

Greer: American's problems go well beyond the 737 Max, it sounds like.

Flippen: It does. We're talking not just about management, cultural issues, 737. We're also talking about their international expansion. It goes back to LATAM in the sense that American wants to be in growing markets. In Latin America, eight out of every 10 flights heads to countries like the United States and North America. That's a huge market. If they start to lose where they did previously have a little bit of an advantage to companies like Delta, it's really going to start hurting their bottom line.

Greer: As we close, let's talk about the stock. Shares of American down over the past five years. Now, the stock's been incredibly volatile. Today, it trades below where it did five years ago. When you compare that to United, Delta, Southwest, all up over the past five years. Going forward, do you have a favorite airlines stock?

Flippen: I definitely have a favorite airline. If anybody knows me, they know I love budget airlines. Before I talk about Spirit again -- which I will be flying later this year when I head back home for a wedding -- I think my favorite airlines stocks is actually Wizz Air. I did also fly this around this time last year. Jim just made a look at me --

Greer: Are you making that up?

Flippen: I am not! Wizz Air is a real airline!

Mueller: Never heard of it.

Flippen: I think it's Hungarian. It's a budget European airline. On that trip, I flew WOW, and then Wizz. One of those companies is no longer in business. It's not Wizz. But Wizz is really interesting. They track really great in airline metrics, which is the cost per available seat mile. I guess for Wizz that's more like the cost per available seat kilometer. Either way, it's really low for the industry. They're doing a great job keeping up their efficiencies, being a budget airline. As a frequent traveler myself, I love airlines that can do that on a budget.

Greer: You mentioned Spirit. Talk to me about Spirit.

Flippen: [laughs] I can never mention Spirit on this show without it coming back at me.

Greer: I've never flown Spirit, but I just have this vision that I'm going to get charged to go to the bathroom. True or false? Do they basically charge you for everything?

Flippen: False for right now, but by the time this airs -- [laughs] Look, budget airlines get a lot of flak because they're the companies that make a lot of their revenue from these additional sales. They charge for drinks, they charge for bags, they charge for early check-in, seat selection. But if you're somebody who's conscious of that, and aware of that, it saves hundreds of dollars on your plane ticket if you're willing to give up those little luxuries. As someone like myself, I will give up those little luxuries for a few hundred dollars.

Mueller: Well, you're young, OK?

Flippen: [laughs] That's true.

Mueller: I don't know how much you've flown. I'm not as young as you are. I am willing to pay up for those extra benefits, where I don't have to worry about being nickeled and dimed to death. And if the airline makes extra money on it, so be it. I traveled so much in coach in my previous job, flying all over the country, in Canada, and even down to Puerto Rico a couple of times. I've come to cherish first class. So I've made a pledge that, I don't fly nearly as often, and I can save up the money, I'll pay up for first class, just for the comfort and the convenience.

Greer: Jim, do you have a favorite stock or a favorite airline?

Mueller: For flying, first class.

Greer: [laughs] Nice!

Mueller: I like Hawaiian and I like using them to the islands where my wife's family is. 

Greer: All right. Let's move on to PayPal. PayPal is writing down a $228 million investment in Uber, an investment that PayPal made right before Uber went public in May. If you haven't been following the Uber story, the whole public company thing, not going so well. Shares of Uber trading well below their IPO price. So Jim, what does it mean for investors? What does PayPal's writedown mean?

Mueller: We'll talk about Uber in just a moment. What PayPal is doing is basically marking to market their investment in Uber. By that I mean, they bought shares in Uber at the IPO price of $45. They invested $500 million. They've got about 11.1 million shares on that. As of last night, those shares are now worth $30.47, or about $340 million. They have to adjust their balance sheet by a $161 million drop. That's going to show up in non-operating earnings, other stuff. It still will lower the net income that PayPal expects to report. 

On the other hand, if Uber's shares ever decide to go up, then PayPal will be allowed to write up this investment, which is not the same as if they were making an impairment on an asset or a purchase, like they bought a company, they incorporated an entire company unto itself, and then they realized they made a mistake and had to write down the value of that purchase. That's a permanent loss. With a mark-to-market loss, they can move it back up if the shares ever go back up.

Greer: OK, so it sounds bad, but it may not turn out to be that bad if Uber shares come back?

Mueller: Right. This is going to happen every quarter with both Uber and with their other public investment in MercadoLibre. Part of this $228 million comes from about a $67 million loss in its investment in MercadoLibre. So as those two companies' shares go up and down, the value of the investments carried on the books will also go up and down. It's going to be a thing for PayPal going forward. Any analyst is going to know enough to back out those kinds of shifts to see what PayPal itself is doing.

Flippen: This is another great way for people who are bearish on Uber to point to how horrible it's been as an investment. You have nobody doing the same for MercadoLibre. Jim's right, this is short-term market movements. And it goes back to the idea of, OK, PayPal invested $500 million at the IPO price for Uber. It's down significantly from there. Is it a bad investment? We don't judge our investments based on such a short time horizon. Why would we judge a company's investments based on such a short time horizon? In a lot of ways, Uber, while it is an unprofitable company, it passes what David Gardner likes to call "the snap test." If you snapped your fingers right now, and that company were to disappear, would your lives change substantially? 

Mueller: No. 

Flippen: Well, a lot of people's would, and I would say the market in general would. So, I think these companies actually have a lot more pricing power than they realize right now. Right now, Uber and Lyft have been competing on price for so long, giving so many rider incentives, that they're both unprofitable. At some point, they're going to raise prices for consumers, and consumers are going to have to pay up for their Uber trips. Ultimately, I think they're going to realize that the value that Uber and Lyft provide in society today has been undervalued, underpaid for by those people who are using rideshare. 

Mueller: Let me expand a little bit upon my "no" -- it's because I would use Lyft instead.

Flippen: Lyft could then raise their prices. If Uber disappeared tomorrow, Lyft would have no competition.

Greer: They're going to end up consolidating, right? This feels like a Sirius XM. That at some point, Uber and Lyft, they have to combine, right?

Flippen: I don't know if I agree with that, actually.

Mueller: Maybe. I don't think regulators would allow that to happen. They need the competition. Otherwise the pricing power goes through the roof and they'll just raise prices once they get rid of all the taxi companies.

Greer: We close with a major award. The Nobel Prize in chemistry was awarded on Wednesday to John Goodenough, M. Stanley Whittingham, and Akira Yoshino for their work on the development of lithium ion batteries. Now, Jim Mueller, you have a Ph.D. in molecular biology and biochemistry. That's one degree. One degree more than me. One Ph.D. more than me. This is a story about science, but it's also a story that has huge business implications.

Mueller: Not only in business, but lifestyle implications. What these three gentlemen did over the years, starting off with Whittingham, at Exxon of all places, was develop a battery that has a high energy density, requires low maintenance, and does not discharge on its own, what's called self-discharge. It doesn't do that very much. And it's rechargeable hundreds and hundreds of times over its lifetime. They replaced the original rechargeable batteries based on nickel-cadmium. You and I might remember those. They were basically good enough for an introductory battery, but the lithium ion far outpaces it. Following Sony's commercialization of the first one in 1991, lithium ion has replaced the nickel-cadmium chemistry.

Greer: So if I have if a cellphone, if I have an iPhone, then I have these gentlemen to thank?

Mueller: Yeah. If you have a cellphone, if you have a computer like our computers here in the studio, without plugs, portable electronics of all kinds, electric vehicles, cars and trucks, even electric tools, hand tools, drills, screwdrivers, those are all lithium ion batteries. And pacemakers. They have a nice, long lifetime of five to 10 years, the kind they use in pacemakers. They need to be replaced. A quick aside, they're exploring rechargeable pacemakers, where they're using the heart's pumping action to recharge the battery so you don't ever have to get it replaced. That's pretty cool, I think.

Greer: That is very cool. I know and I want to let you share a quote,  because there was a great quote about the Nobel Prize win. I want to give you an opportunity to share that. 

Mueller: One of the gentlemen, a professor of chemistry from Linnaeus University, Olof Ramstrom, said, "This is a highly charged story with tremendous potential." As a science nerd, I love that because it's two puns for the price of one. 

Greer: I love that. But, when we talk lithium batteries, there are positives and there are negatives.

Mueller: Yeah. The positives -- Oh, OK. That one flew right by me. Good for you, Mac! Not as nerdy as the Linnaeus professor's quote, but still pretty good. But, they require some safeguards to make sure they don't catch on fire. You may remember the Galaxy Note 7 catching on fire -- in people's pockets, no less. Very dangerous. Even Boeing had battery fires on some of their 787s when they first came out, just because of the issues with the batteries. One of the issues is that they can discharge too quickly, and you can overcharge them. In both cases, too much current comes out or is put in too quickly, and the batteries heat up and then can catch on fire. We've seen that not only with the small fires on the Galaxy Note 7, but also some big fires from like Tesla's cars. There's issues.

Flippen: I don't have a Ph.D., but I do know that anytime you put a battery in my pocket, the less it can catch fire, and the quicker it can hold its charge, probably the better for me as a consumer. I think the battery industry in general has been really overdue for a rehaul.

Greer: That's a plus.

Flippen: [laughs] It's a plus.

Mueller: One of the things is that lithium and cobalt, one of the other chemicals used in the battery, are in kind of tight supply, and getting tighter. Apple, for instance, I believe, bought a cobalt mine in Africa a couple of years ago so that they could have a steady supply of one of the ingredients in these batteries. Many of these batteries are manufactured in China. Panasonic is a big one, they're a Japanese firm. They're the firm that provides Tesla with its batteries. BYD and Samsung, Nokia, Motorola, Kyocera, they all manufacture batteries for either vehicles or smartphones or drills and hand tools and things like that.

Greer: As we wrap up here, obviously, this story and research and the development of lithium batteries, just huge business implications. I want to bring it back to the Nobel Prize. I'm awarding you a Nobel Prize. It can be for anything. What do you want? What do you want to win the Nobel Prize for?

Flippen: Ideally, I'd want to win a Nobel Prize for great stock picking. Realistically, what I could win a Nobel Prize for is weird body contortions. No, seriously! Seriously! I can do stuff like swallow my tongue. 

Greer: It's a new category -- swallow your tongue?

Flippen: I can swallow my tongue! It's weird, right? I can turn both my feet all the way inward.

Greer: Be careful. Isn't that dangerous?

Flippen: I haven't choked yet!

Mueller: We're filming today, right? It's no longer just a radio show?

Flippen: [laughs] It's not pretty to look at.

Greer: Anytime you have to use this sentence, "I haven't choked yet," you're probably doing something you shouldn't be doing.

Flippen: [laughs] Probably. 

Greer: Wow! OK. So, weird body contortions.

Flippen: I'll take that prize.

Greer: I like it! Jim?

Mueller: I think there should be a Nobel for education, for educators. I'd like to win it. I love teaching people what's going on and so on. 

Greer: I like that!

Mueller: There are so many great teachers, and we need teachers to educate the youth of the world, not just here in America, in Europe and Asia and Africa and all around the world. Australia. I forgot Australia. Sorry, guys!

Flippen: Can I change my answer? [laughs] 

Mueller: [laughs] So, it'd be really cool, not only for the advancements of science, which is what a lot of the Nobel prizes are for; but also the advancement of human potential, I think should have a Nobel Prize. 

Greer: I like that! I think I'd like to win mine for fun. A Nobel prize for fun.

Flippen: Swallowing your tongue is not fun?

Greer: No, that's fun.

Flippen: Then you might have some competition.

Greer: We could share the prize. I like that! You have to bring your own fun in life.

Mueller: Sure, sure. Pull away from my serious talk. 

Greer: [laughs] OK, so, as we wrap up, the desert island question's a little tricky this week. I'm going to give you a few stocks. If you're on a desert island for the next five years, which one are you going with? Let's go Boeing, American Airlines, PayPal, and Uber. 

Mueller: PayPal, in an instant. 

Greer: Wow, didn't even hesitate!

Flippen: PayPal is a great company. But you know what? I think I'm going to actually go with Boeing. These are serious issues for Boeing right now, but they are in an oligopoly with Airbus, and I think that gives them a really strong competitive position.

Mueller: I like Boeing. That would be my No. 2 choice over the other two. But I choose PayPal because they're revolutionizing the way people pay each other. As Jason Moser likes to say, the war on cash. I think it has a great potential in front of it. 

Greer: 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. Emily and Jim, thanks for joining me today!

Mueller: Thank you, Mac!

Flippen: Thank you for having me!

Greer: That's it for this edition of MarketFoolery! This show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening! And we will see you tomorrow!