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Why This Fintech Stock Went Down 75%

By Chris Hill – Jun 22, 2020 at 4:47PM

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The German company delayed its annual report over auditors' concerns.

In this episode of MarketFoolery, host Chris Hill chats with Motley Fool Asset Management's Bill Barker about the latest earning reports and headlines from the around the market. A retail giant posted higher-than-expected profits and revenue, but investors were not impressed. There is some bad news coming out of the fintech world, and a large automaker issued an exciting announcement. Finally, the duo discuss the return of baseball and much more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on June 18, 2020.

Chris Hill: It's Thursday, June 18th. Welcome to MarketFoolery. I'm Chris Hill, with me today, the one and only, Bill Barker. Good to see you, my friend.

Bill Barker: Good to be here. Thanks for having me.

Hill: We've got automotive news, we've got fintech news. We are going to save the baseball season at the end of this episode, but we're going to start today with groceries.

First-quarter profits and revenue for Kroger (KR -2.08%) came in higher than expected. Shares are down a little bit today, although, I don't know, I feel like if you're a Kroger shareholder, you got to be pretty happy with the quarter they just put up.

Barker: Oh, yeah. It was a good quarter, but not a game-changing quarter. And I think that's maybe why the market isn't reacting as enthusiastically as I certainly would've expected in response to a very, very good quarter. The other thing that might be muting enthusiasm for the stock is no update on guidance and for, sort of, a business that's doing as well as this and is likely to be seeing rather consistent results at the moment, you might expect that they could go ahead and give some guidance. I don't know whether that's taking something off the stock today or not, but it's a mild surprise, I guess.

Hill: Digital sales up 92%; that's not surprising given all of the various companies on the spectrum of retail that have come out over the last few months. And they give their quarterly reports and everybody's digital sales are up big, so that's not a big surprise, but I'm curious if you think that long-term this helps Kroger. If this maybe boosts their same-store sales growth even incrementally, just because it seems like one of those things where people get in the routine with grocery shopping if they're going to be establishing an additional routine then maybe that helps Kroger down the line.

Barker: Maybe they are, sort of, unwilling again to provide guidance on whether the increased use of at-home cooking is going to become a trend or something that's in any way sustainable, so they're open to that idea and they're hoping that's the case, I'm sure. But we don't really know, right now everything is in flux. And they did a couple of things that maybe muted, sort of, the bottom line. One, as they note in their bullet points that start off the reports -- so, these are the things, I think, that are maybe most important, at least in terms of numbers -- that they invested $830 million to safeguard associates, customers, communities. So, that's all the increased safety measures, the plexiglass; you know, I don't know how many hundred million dollars it cost to put the little arrows on the floor for the aisles as to which direction you're supposed to go. I think it's mostly the increased cost, the increased pay that they're providing their associates and the workers as some level of compensation for the risks that they're taking on. They've also bulked up their pension plans.

So, I think that they've sort of raised the floor. They've worked down some debt and I think they've improved the position they'll be in when times are tougher by having, sort of, paid some things ahead now, when they can. But I don't know that the ceiling is really all that much different for the company. They have the digital sales; they have to be there. There's extremely competent competition against them on the digital side, though. So, the mere fact that they're up 92% may not be enough.

Hill: The stock of the day is a Wirecard. Wirecard is a payments company based in Germany. And it's the stock of the day because it is down more than 60%. Wirecard delayed their annual report, and I'm going to quote directly from [laughs] The Wall Street Journal story, because the auditor said it had been deceived over evidence of $2.1 billion in cash balances, which sounds like an overly complicated way of saying, "Hey, you guys are missing $2 billion on your cash balance sheet. Where did that go?" This seems horrible. I mean, you and I were talking earlier today, Company X comes out and says, "We're delaying the release of our annual report," with no other information. That stock is down 15%. Now on top of it, we got the whole, "Oh, by the way, there might be fraud." [laughs] "We might be missing some cash."

Barker: You know, I think you have to think of examples of, say, someday perhaps you may have experienced this where your spouse says, "Hey, there's this much in the bank account, why isn't there more?" And you say, "Oh, I forgot to tell you, I bought a thing," or something like that. Yeah, when there's $2 billion less in the bank account than they're supposed to be in, you're going to be in a lot of trouble, and --

Hill: Yeah, but I'll just add, that if you or your spouse buy something, yes, there's less money in the bank account, but presumably you have whatever is that thing you purchased. [laughs] This appears to be a case where $2 billion is gone and they have nothing to show for it.

Barker: Well, you might have bought, like, a vacation that you forgot to mention. "Oh, I forgot to tell you my buddies and I went off to Vegas, and, well, I can't give you the details but there's less in the account." Right? Because what happens in Vegas, stays in Vegas, so you're really not allowed to fill that in.

And here, too, the details need to be filled in, and there seems to be a series of articles, I think, in the Financial Times that are alleging some fraudulent accounting going back into 2019. So, this is, you know, one of these tech payments companies that was the darling of the German stock market for a while, it's now lost 75% of its stock market value. And, you know, where fraud starts, you may see that it's going to lose even more than that, I wouldn't doubt that they're in for significantly tougher times than what they're experiencing today.

Hill: You think back a couple of months to what happened with Luckin Coffee and the fraud there leading to all sorts of people asking the question and all sorts of articles asking the question, "Should we just swear off of Chinese stocks? Should we just avoid Chinese stocks altogether?" It's going to be interesting to see if we now see a raft of similar questions and articles, should we just avoid all German stocks? I don't think we're going to, but it'll be interesting to see.

Barker: [laughs] No. I don't think that's the first stop that many will go on, since German organization is usually held up as something that the country is pretty proud of. So, I think that this is a seemingly much more disorganized company than its brethren in the German market, and I think that there probably will be more questions asked of other digital payment companies and a little bit more scrutiny on those in general. You know, does this kind of behavior apply in the rest of the industry, is a worthwhile question. I'm not saying in any way that it does, but I think that's, to me, the focus group that I would look to before looking at German companies as a whole.

Hill: I'll just close with some comments from Markus Braun, who's the CEO at Wirecard. You know, God, bless him! He's trying to reassure investors, but I don't think his follow-up statement actually accomplished that, because, and I'm quoting here, he said, "It is currently unclear whether fraudulent transactions to the detriment of Wirecard have occurred. Wirecard will file a complaint against unknown persons." That's a nice try, but that is not [laughs] filling anyone with confidence.

Barker: [laughs] No. We don't know who's at fault here or how bad it is, but we'll file a lawsuit for sure. At the very least, a strongly worded letter.

Hill: [laughs] Let's move on to Ford Motor (F -2.35%) who came out saying that Ford Motor is going to offer hands-free driving in its new model of the Mustang, which is the Mustang Mach-E, it is an all-electric crossover. Here's the curious part, though: The Mustang Mach-E goes on sale later this year. The software that enables hands-free driving is not going to be available until the fall of 2021. Let's just go ahead and assume that they actually hit that target, that it actually is available in the fall of 2021. Does that strike you at all as odd that they would come out and say something? Like, why are you doing this?

Barker: [laughs] Without knowing anything about the automotive industry and how the sequence of developments goes, I would imagine -- you know, Tesla updates the software on its cars, your phone probably inflicts a certain amount of automatic updates on you. There is the ability to produce the hardware today that is good enough to do much of what you want the thing to do, and the software to follow, which will make it hopefully even better.

I understand, you know, in terms of driverless software capabilities, I would expect people to be skeptical until this is really proven out. So, maybe this is another question to ask, why if the car is going to be able to do this, why don't you wait until the whole thing is ready? But in the meantime, you get to drive a Mach-E, I mean, you're passing over that. How fast is that thing going?

Hill: Do you think it's going as fast as the Mustang Mach 5?

Barker: Well, see, I don't think there was -- I think there was a Mustang Mach 1, and of course, there is a Mach 5, but that's Speed Racer's car. I don't think Mustang has actually produced them. I don't think they have the guts to produce a Mach 5.

Hill: [laughs] You're calling out Ford Motor?

Barker: [laughs] And everybody who loves Fords. Yeah, that's a big crowd I might be taking on. But you've got opinions about this, you're a big Speed Racer fan.

Hill: I've never in my life watched Speed Racer. Not the ill-fated movie nor the series itself, no. I don't --

Barker: Were you not raised in America or is this -- when did it get its independence from Canada?

Hill: It was the late '90s.

Barker: Late '90s . [laughs] So, they didn't allow Speed Racer there?

Hill: Yeah, it took a while, we had to get bootleg VHS tapes. You know, you raise an interesting point in terms of the phones.

Barker: I did not raise an interesting point. There was a --

Hill: No, I actually think you did. No one's more surprised than I am. But if you think about, sort of, phones updating. I think you're right, we are going to get to the point where -- you know, Tesla is already there with updating its car software. Presumably Ford is going to get there with this. But when you think about consumer technology and how there are those enthusiasts, there are those people who line up outside the building so they can get the latest iPhone or the latest Samsung Galaxy phone. It's going to be interesting to see who are the people who want to be among the first to try out driverless cars, to try out the hands-free driving and really make that work.

Because to your point, I think you and I, and many others, are sort of in the camp of, "No, when it comes to driving, I'm going to let other people test that out, prove that out before I decide to do it myself." And so, you know, it's just going to be interesting to see how big that market is, how big is the addressable market of people who want to be first in line to go with hands-free driving.

Barker: Yeah. Well, there's going to be way more regulatory checks and balances on the hands-free technology than there is on the standard driving that we're used to. And there about, I think it's been pretty consistent, about 100 deaths a day on the U.S. highways and for decades, it's gone down pretty dramatically in terms of the number of miles driven. Driving gets safer and safer, cars get safer. I think the introduction of Uber's platform has eliminated a lot of the most dangerous driving, that being drunk driving, but we're used as a society to 100 deaths a day going more or less unnoticed on our highways.

And, you know, the first several deaths that occur with this technology will all be international stories which will both slow down the progression of it but also, I think, on the plus side are going to require extremely high levels of confidence in the technology to clear society's hurdle. So, you know, your grandkids aren't going to drive a car, right? They may learn that like the way people learn to sail or something, as a thing that you can learn to do, but basically nobody else, not a large chunk of people bother to learn it, right?

Hill: I guess we'll see, you know. They don't exist at the moment, thankfully and --

Barker: ... your grandkids? [laughs]

Hill: [laughs] ... my grandkids, yeah.

Barker: But, you know, there is a probability of their arrival more or less on schedule. I could probably come up with a year, off the top of my head, where you'll be a grandfather, and I'm willing to do so, you having started the show by accusing me of being 97. [laughs] So, maybe we'll go there.

Hill: Let's wrap up with this, because a week ago on this show, Dan Kline and I were talking about Major League Baseball, and Dan, at the time, a week ago, which really, realistically that's like three months ago. But a week ago, Dan was very confident there was going to be a Major League Baseball season.

Let's go with this scenario, because more so than any of the other major sports in America, baseball, the Players Union and the commissioner, the owners are at odds more so than the other sports. So, one thing that has been raised as a possibility of arbitration. So, that's the scenario I want to set up, because not only are you one of the biggest baseball fans I know, you're a smart guy, you went to the University of Yale, you finished top of your class at University of Virginia Law School. So, let's pretend you're the arbiter, Rob Manfred, commissioner of Major League Baseball; Tony Clark, head of the Players Union. They come to you and they say, "Bill, whatever you decide that's what we're going to do." You get to decide the terms and the schedule and how many games and all of that, what do you come up with, how do you make Major League Baseball work in 2020?

Barker: Well, I'd go for an 81-game schedule; half of the usual. And I would basically start with, give me the data on what the revenue split between owners and players was over the last year and the last three years and we'll start with that as something that people seem to feel was fair, fair enough to go ahead and play baseball in the past. And you know, there may be some mild adjustments to that because the revenue is going to be in different buckets; it's mostly going to be in TV, maybe all, TV and radio. And whether fans attend a baseball game or not, I don't know.

So, there's, obviously, massively decreased revenue from the stadiums and that has to be borne by both sides, but if you can split up the revenue in roughly the same way that it was split going into this, and the profits -- it's a little different, I mean, the players' revenue is more or less profit and the owners have got all the expenses, but I think everybody ends up making enough money to go ahead and do this. And maybe you call this a one-off thing that isn't the new math that dictates the future, because that's a bigger chunk of what the problem is, not so much how to divide up today's pile of money, but not to use today as a precedent for tomorrow.

Hill: You just saved the baseball season. A grateful nation thanks you. Bill Barker, thanks for being here.

Barker: Thanks for having me.

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 next week.

Bill Barker has no position in any of the stocks mentioned. Bill Barker is an employee of Motley Fool Asset Management, a separate, sister company of The Motley Fool, LLC. The views of Bill Barker and Motley Fool Asset Management are not the views of The Motley Fool, LLC and should not be taken as such. Chris Hill has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Luckin Coffee Inc. The Motley Fool recommends Uber Technologies. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Ford Motor Company Stock Quote
Ford Motor Company
$11.20 (-2.35%) $0.27
The Kroger Co. Stock Quote
The Kroger Co.
$43.75 (-2.08%) $0.93
Uber Technologies, Inc. Stock Quote
Uber Technologies, Inc.
$26.50 (0.30%) $0.08
Wirecard Stock Quote
$0.00 (-91.67%) $0.00
Luckin Coffee Inc. Stock Quote
Luckin Coffee Inc.
$16.50 (0.55%) $0.09

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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