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Why You Must Not Ignore This IPO

By Chris Hill – Updated Jul 27, 2020 at 9:07AM

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Discover what makes this cloud-based software provider for financial institutions a good choice for investors.

In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Jason Moser about the latest earnings reports and news from the markets. Find out how the financial sector is doing as two big banks announce their earnings reports and the guys go through the numbers. They also look at the report from an airline company, talk about a new IPO on the block, 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.

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This video was recorded on July 14, 2020.

Chris Hill: It's Tuesday, July 14th. Welcome to MarketFoolery. I'm Chris Hill, with me today, Mr. Jason Moser. Good to see you.

Jason Moser: Hey-hey! Good to see you.

Hill: We've got airlines, we've got a red-hot IPO that we're going to get to, we're going to start, though, with the big banks. JPMorgan Chase (JPM 1.21%) and Wells Fargo (WFC), both out with second quarter reports. Shares of Wells Fargo are down about 5% as you and I are talking now, Jason. JPMorgan Chase slightly in the positive range. And, look, you host Industry Focus on Mondays, focusing on banking and financials, you know this world better than I do. To my untrained eye, the main difference here, in these two quarterly results, is investment banking. I mean, JPMorgan Chase posted nearly $10 billion in trading revenue this quarter. That's a record for them. That certainly is a tool in their toolkit that Wells Fargo just doesn't have.

Moser: Yeah. And you know, I did make a point in the notes this morning, I said, thank goodness for investment banking. Because you're right, in the case of JPMorgan, investment banking was what really helped keep them, you know, looking a little bit more on the glass-half-full side today. That investment banking was up 85% for them, you're right, Wells Fargo just doesn't have that same dynamic of the business.

Let's start with the bad news, Chris; let's end on some good news, so we'll start with the bad news first. And when I say bad news, unfortunately I mean Wells Fargo. So, sorry for all you Wells Fargo shareholders out there. But when we talk about this last quarter, the headline really summed up in two words was "loss reserves" and that really hasn't changed this quarter. I think we were hoping we would get a little bit more understanding as to how to really quantify the effect of this pandemic, we're still not quite there yet. But when we look at Wells Fargo, $8.4 billion increase in loss reserves. And we knew going into this quarter for Wells Fargo, it was going to be a problem because of the stress test, because of their precarious financial position, and really, this is all stuff that's sourced back to being it's like 2016, with all of these culture issues and the accounts scandal and whatnot. They're really paying the piper from, you know, all of this controversy that stemmed from a few years back. And it really is because the pandemic is putting everyone in such a pinch.

But Charlie Scharf said it in the release, and I think this is what we were really expecting to hear from them. He said, "Our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter, which drove the $8.4 billion addition to our credit loss reserve in the second quarter." And he goes on to say, "While the negative impact of the pandemic is unprecedented and many of our business drivers were negatively impacted, our franchise should perform better, and we will make changes to improve our performance regardless of the operating environment."

Now, the good news is, I think he's right, the franchise should perform better. They're going to make changes but some of those changes, really, they're not necessarily voluntary, right? The stress test sort of commanded that they make these changes. And one of those changes, the dividend is going to get slashed considerably in the third quarter. They'll have to just sort of play it by ear quarter-by-quarter from that point going forward to see the kind of financial status the bank is able to maintain. But clearly, so tied to the housing market, it's really putting them in a bind.

Hill: Does Wells Fargo benefit over the next, call it, three to five years, because they are a more consumer-facing bank than the other big banks on Wall Street? Do they benefit more from consumers just saving more money, does that help them, does that move the needle for them? Because I'm seeing more and more arguments, pretty compelling in some cases, that one of the ripple effects of the pandemic in the United States is people are going to be better at saving money.

Moser: Yeah, I mean, hopefully that's a long-term byproduct of this. And I think, generally speaking, yes, they should be able to benefit from consumers saving money. I mean, you figure, the more capital they have, the more they're able to do with it. The problem is, these banks are suffering from just a very, very low-rate environment, that net interest margin that they keep reporting continues to just essentially have a lid placed on top of it. And so, they pay out a certain amount of money for people leaving money in the accounts and then they pull in a considerable amount of money from the money that they lend out. And any which way you put it, with rates where they are, they're not pulling in nearly as much as they might normally on those loans. And they pretty much already hit [laughs] as low as they can go on deposit rates. So, I'd say that's not really a source of strength for them right now, but they're not the only ones in that, sort of, bucket so to speak.

Now, when you look at JPMorgan, same story, net reserve build of $8.9 billion last quarter, that was on top of $6.8 billion. The good news is that JPMorgan is a far better capitalized bank, it's not dealt with the cultural issues, it has that investment banking segment to the business, up 85%, as I mentioned. They facilitated $28 billion in Paycheck Protection Program loans. And while that's not really going to be a big source of income, really, for them, and as matter of fact, I think that JPMorgan and the other big banks decided that the money that they do make from that program, they'll donate to charity; if I'm not mistaken. But it keeps money moving through the system, and probably [...] accounts.

Repurchases have been suspended, at least through the end of this current quarter, but the good news is for shareholders, they intend to maintain that $0.90/share dividend in the current quarter as well. So, JPMorgan certainly on firmer footing. And I think that is just, really, a testament to leadership and culture that has been with that bank for such a long time. Wells Fargo is clearly in the midst of a cultural change, and I'm sure five years from now they'd like to be looking a little bit more like JPMorgan does today.

Hill: Last thing before we move off the banks, anything came out of Jamie Dimon's mouth regarding the economy in general that caught your attention?

Moser: No. You know, I didn't see anything in the actual release other than just cautious optimism. I think the general feeling is that this is dragging on a little bit further than people were probably hoping, but they probably thought maybe this case scenario was a possibility anyway, in that, it's good; in that, they, I think, prepared for the worst and, really, hope for the best. JPMorgan, that is. And Wells Fargo, not quite able to do the same thing. So, I'd put JPMorgan management still, you know, cautiously optimistic, but, really, they've done a good job of preparing for the worst and then, sort of, hoping for the best.

Hill: Shares of Delta Air Lines (DAL 2.38%) are down a bit this morning. Second quarter -- look, there are a lot of numbers here, the one that caught my attention; adjusted operating revenue, 91% lower than a year ago. You know, anytime a business [laughs] is talking openly and clearly about their recovery plans, you know that the business is challenged, to say the least. And in the case of Delta, they're being very clear about the fact that they are looking to reduce their fleet and that they see a future where they are -- to use their words -- a smaller, more efficient airline.

Moser: Yeah, I think that's it. And in line with that operating profit number you're talking about, I mean, you look even just at that very, the source of that, right, that topline revenue number. Revenue down 88% from a year ago this quarter, which -- I mean, that's the driver of everything, really. And at this point, airlines are just stuck in a position where the demand is just not there, for obvious reasons. And so, they have to figure out how to deal. They're dealing with trying to buy employees out for retirement packages, early retirement packages. They are furloughing, they're having let people go, doing everything they can, ultimately, to reduce that daily cash burn. They did mention that they've brought that number down to $27 million; that daily cash burn to $27 million by the end of June. Which was down from roughly $100 million a day at the end of March. So, they're really in cash conservation mode.

And you know, thankfully Delta does have some capital resources to deal, and the debt they have on their balance sheet is staggered out, but I mean, I think all airlines are really finding themselves in a real predicament here. I think that Delta is in a place where they can weather this storm for a while, they mentioned, I think, they quantified it as 19 months of liquidity. I don't think this is going to be something that drags on for 19 months. And perhaps, it's one of those situations where when things start to improve- hopefully, we're looking toward the end of this year, beginning of next year -- Delta might be one of those strong companies that comes out of this a little bit stronger, but no doubt airlines are not the place to be these days.

Hill: Am I right that later this week you're going to be doing a little boots-on-the-ground or rather boots-in-the-air research on Delta Air Lines? [laughs]

Moser: [laughs] You are correct. Yeah, I'm going to be putting my skills to the test, I'm going to be flying Delta down to Atlanta, and then renting a car at the airport in Atlanta to drive down to Moultrie to see my mom and dad, and take a few days to go relax and play some golf with my dad to sort of catch up with them. So, yeah, I'm going to be very interested to see this experience all the way from going to the airport here, getting to the airport in Atlanta, renting the car. No, I'm not renting a car from Avis, folks, so don't worry about that, or Hertz, rather, I'm sorry, Hertz, right, it was Hertz that just declared bankruptcy, not Avis. Yeah, I'll certainly come back with any and all notes regarding the travel experience, because I'm sure it'll be a little bit different.

Hill: I don't know, is Hertz still operating? I mean, maybe you can get a deal now. [laughs]

Moser: It was a box that I could check on, but you know what I thought, Geesh! I don't want to get a car from those guys, they might be cutting corners, so I think I went with Enterprise. [laughs]

Hill: Smart move. nCino provides cloud-based software for financial institutions. The company is based in Wilmington, North Carolina and not Encino, California, as I think, both you and I were very much hoping. It starts trading today under the ticker NCNO. We're closing in on 12:00 noon at this moment, Jason. And typically when a company goes public, by now the price is known.

Whenever this price gets revealed, probably not before [laughs] the end of recording this podcast, it's going to be something to see because they initially set the IPO at $28 to $29 a share, they increased it to $31 a share. And everything I'm seeing from financial media and from, sort of, FinTwit, if you will, is that, when this gets open to the public, it is going to be north of $60/share, possibly even north of $70/share. You had a chance to look at nCino's S-1, what did you think? 

Moser: Yeah. Well, listen, the first condition has been met. I mean, it does use the term SaaS in its S-1 multiple times. So, it's got that going for it. So, no matter what it does, SaaS, you've got the market's attention at this point, for better or worse. You know, in looking at the business, I do like the market that it pursues, essentially this is cloud-based software for banks to help basically run their operating system. nCino bank operating system, it's focused on loan origination, account opening and helping banks really bring all of their operations, sort of, under one operating system and making it a little bit more sleek, a little bit more efficient, utilizing artificial intelligence, machine learning, all of that kind of good stuff, with all those buzzwords we're talking about today, and that come with that SaaS model.

I mean, it's not a big company by any means, I mean, they chalked up $138 million in revenue for fiscal 2020. And the majority of that is subscription revenue, right; it's a SaaS business. So, it's nice recurring revenue. But when you consider the market opportunity, and we're talking about the biggest in the sense of just financial institutions, they whittle that down and actually consider their opportunity to be more in the $10 billion range it sounded like, you know, they're not talking about some market opportunity that's going to be like hundreds and hundreds of billions of dollars, but they do see a market opportunity for themselves around $10 billion. So, $138 million versus $10 billion; you can see the opportunity to grow there.

They do have big bank customers, like Bank of America; Truist, I know you're a big fan of Truist, Chris, you know the name change, that was a game changer for them, wasn't it?

Hill: It really was.

Moser: [laughs] They maintain smaller bank customers as well. So, they do cover the spectrum there. It's, I guess, really just trying to get a beat on what kind of competitive position they really hold, they have an interesting relationship with Salesforce. Salesforce is their second-largest stockholder. And their product, their operating system is essentially built on Salesforce's platform, so they do rely on Salesforce, not only as a supplier but also as a shareholder. So, you know, a lot to learn, I suspect we're going to walk out of this thing that they got swindled and that there was mispricing and they lost out on a lot of money as these IPOs seem to do these days. You know, it seems to me like a direct listing would be a smarter way to go, it just seems like there are more and more examples coming out where these IPOs are just not really offering the best results for the companies that are pursuing them, but I can certainly see the interest in this business. I think it's really just going to be a matter of checking under the hood and understanding what its competitive advantage really, really can be.

Hill: Yeah, it is going to be interesting to see if we see more direct listings in the future. You know, I think of it a little bit like what we've seen over the last few months with guidance. So many companies suspend guidance for all of the obvious reasons, but I would not be surprised if once we are through the pandemic and as close to back to normal as possible, if some of these [laughs] companies just say, "Yeah, no, we're not doing that anymore. We haven't done it for the past three or four quarters, we're just not going back to that anymore. And you all figured it out, because we're just not that worried about it and we're not going to play that game anymore." It really does seem like, if nCino could go back in time, [laughs] a direct listing would have probably been more lucrative for them, but we'll see what happens.

Moser: Yeah, that's all you can do. I mean, it's always fun to see these new businesses come up, because you certainly understand the problems that they're trying to solve. With nCino, it's a company that was founded by bankers. So, they feel intimately connected to the problems that they're trying to solve in that banking operating system. And I mean, I can certainly tell you, speaking of experience working at a bank, now this was several years back. I mean, this is in the mid-2000s, but I mean, even then at a big bank -- I was with Bank of America -- there were areas that were piecemeal, kind of. You know, it wasn't streamlined, it wasn't consistent, it was a little bit clunky and piecemeal. And so, I certainly could see the benefits from trying to streamline these operations. And if that's the problem, nCino is really solving what others can't solve, then I imagine they would have an opportunity in front of them.

Hill: Jason Moser, thanks for being here.

Moser: Thank you.

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.

Chris Hill has no position in any of the stocks mentioned. Jason Moser owns shares of Booking Holdings. The Motley Fool owns shares of and recommends Booking Holdings and The Motley Fool recommends Delta Air Lines. The Motley Fool has a disclosure policy.

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