In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Jim Gillies about the latest headlines and earning reports from Wall Street. They go through the latest report from Lyft (LYFT 2.35%) and talk about the ridesharing industry. They've got a cannabis stock that is down. Jim shares his favorite Nebraska company that isn't Berkshire Hathaway, and they talk about Veterans Day and much more.
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This video was recorded on Nov. 11, 2020.
Chris Hill: It's Wednesday, November 11th. Welcome to MarketFoolery. I'm Chris Hill, joining me today from up North, it's Mr. Jim Gillies. Good to see you.
Jim Gillies: Good to be seen, Chris.
Hill: We got some news items to get to, and we're going to talk, of course, about Veterans Day, but let's start with Lyft, because shares of Lyft are up more than 5% this morning, not because Lyft was profitable in the third quarter, it was decidedly not profitable, but Lyft's revenue was higher than expected. And Jim, they say they're working on a food delivery service which seems like something that they probably should have been working [laughs] on a while ago.
Gillies: I feel that today, I'm going to apologize in advance, at least on the business things or at least on the specific stocks we're going to discuss, because I'm going to come off as rather negative. I think it's warranted, but I'm going to come off as rather negative. You said Lyft is not profitable yet, my internal monologue says, and never will be. They're working on a food delivery solution. Great, no competition there, no one else is doing it. And look, in a post-pandemic world, which I have to hope we're going to get to at some point, we've just listened to about half-an-hour on the vaccine on coronavirus, I mean, we are hopefully in the beginning of the end of the lockdown from what have you. Are we still going to be ordering as much food and having it delivered? I'm not a fan of food delivery anyway; that's, you know, more expensive for less tasty food. But I think we'll be going out a little bit more.
And so, at some point Lyft and their cousin Uber (UBER 3.25%) are going to be valued as regular businesses again, the unicorns, if you will, as what is this business, kind of, supplanting the taxi industry? And the problem why I doggone Lyft and Uber -- more on Uber than on Lyft, but I'll save some shade for Lyft -- is that these businesses have a, now, fairly long and demonstrated history of being unable to be either, A. profitable or B. cash flow positive. And I have opined in many places, many times, that companies that cannot self-finance, that cannot be cash free, cash flow positive, eventually hit a wall when the capital markets simply refuse to maintain this, I'd say "charade," but maybe that's too hard. Just refuse to maintain the cash-burning ways of these businesses. And we're going to get a real fine example of that in about five minutes.
But there is just this idea that the money eventually comes to a stop, the music eventually stops, and then what? You know, you just recreated the taxi industry, except you're profoundly unprofitable. And until that changes, until either Lyft or Uber demonstrate this ability to at least see a direction to get to cash flow positivity, cash flow breakeven, what have you, I think you're just going to see a continued cycle of burn cash, raise more money; burn cash, raise more money.
And this quarter, you know, look, year-to-date the first three quarters of 2020, Lyft has burned nearly $1.2 billion in cash. Now, the most recent quarter was good, they only incinerated $170 million. And if you read the press release for the earnings today, they're very much pointing you, and the story they want to tell, the narrative they're trying to frame is, look how much better Q3 was than Q2. Look at our growth from the previous quarter. Okay, great. That's a step in the right direction, but it's a step, again, into a more normal world where these companies, if viewed in a normal world, are inherently, structurally unprofitable and money losers, and that eventually stops.
Hill: We've talked about businesses across all ranges of industries over the past six months that, putting aside the business, if you look at just the stock, there is a point at which you say, well, that stock has sold-off to the point where that's just ridiculous. We've seen all kinds of businesses that have doubled and tripled since their lows, you know, whether it's late-March, early April, whenever it was. Lyft is one of those businesses, there's a point at which, in 2020, if you bought shares of Lyft, you're thrilled with how it's performing today, you don't even have to go back that far. A week ago today, Ron Gross and I talked about how Uber and Lyft, a week ago, were each up 10%, 15% because California voters passed Prop 22 which basically, you know, if it hadn't passed, it might have been the death knell for those two businesses, and instead they got another life out of it.
But to your point, it's hard to see Lyft and Uber right now, as they currently stand right now, as businesses that we as Foolish investors [laughs] like to see. It's tough to look at them and say, yes, this is a stock I want to own for the next 10 years, because I think 10 years from now it's going to be exponentially larger. I mean, it really seems much more in the category of the stocks that we don't like to own, which is, boy! if you time this right, and you hold it for three months, you're going to get on -- sure, [laughs] you'll pay the higher capital gains tax, but yeah, if you time this right, this could be a good stock to own for three months.
Gillies: Yes. I mean, you talk about a 10-year look-forward for Lyft and Uber, or Lyft I suppose. Look, Lyft, how much more cash are they going to burn in the next 10 years? How many more shares will be outstanding as they have to finance themselves over the next 10 years? And I feel like I'm almost a prequel for our next topic, because, you know, as a company hoses out more shares that becomes a much larger base, that if they ever do get to profitability, if they ever do get to cash flow positivity, you now spread it out over a much, much larger base. And so, if you ever do get to the promised land, you've essentially diluted the early believers.
Our friend Emily Flippen, who does the Industry Focus podcast, has an analogy with stocks of you date, you don't marry. And this is very much -- Lyft, if you want to play the Lyft game or the Uber game, this is, you date the stock, you don't marry it, so. [laughs]
Hill: Speaking of dilution, Aurora Cannabis (ACB 2.32%) announced that it plans to raise $125 million through a secondary offering. Shares of [laughs] Aurora Cannabis down 20% today. Holy cow! I mean, and this is another one, this is a ...
Gillies: Oh, this is another one.
Hill: Well, no, I was going to say, just in terms of businesses that people were more bullish on a week ago today, because a week ago today, we could look at California voters passing Prop 22. We could also look at voters in five different states giving the green light to some version of cannabis legalization, and any luster for Aurora Cannabis and those businesses is lost when they come out with news like this.
Gillies: Can I go off on this company now?
Hill: Oh, absolutely.
Gillies: Cool. I have no idea why anyone wants to own this company at all. I don't think you should, I think if you're hoping to get back to some higher price you assuredly paid, you should probably forget that. You know Chris, I am not a big fan of the marijuana companies anyway. There's a reason they call it weed, you know, it's not hard to grow. And looking back, so I live, of course, in the completely cannabis legal utopia that is Canada. And so, if you had bought -- Chris, is there anything more bullish than this Canadian company -- Aurora Cannabis is a Canadian company -- anything more bullish than legalization countrywide which came into force on October 17th, 2018, so barely two years ago. And if you were a buyer on that day, Chris, you have lost 95% of your money. It is legal across the country, and you are down 95% since that day. This is like Lyft, like Uber, but perhaps even more an aficionado of the sport. These guys burn cash for fun. And they have a June fiscal year, in fiscal 2017, they burned $39 million, in fiscal '18 they decided to up the ante, they went to $219 million burned. In 2019, fiscal 2019, they burned $606 million. In fiscal 2020, they burned $693 million. They are off to a rousing start in fiscal 2021, with one quarter reported, they burned $124 million. Over this period of time, they have financed themselves increasingly through share issues, and we're not counting the latest thing which is responsible for today's 20% drop, they have gone from 30.5 million shares at the end of fiscal 2017 to the most recent quarter they now have 133.4 million shares, before what they're about to issue on the market. This is not going to stop; they're going to continue burning money to grow. I don't understand why people want to play in this space.
Hill: Because someone is going to win, right? I mean, put aside Aurora Cannabis, let's just --
Gillies: How do you define win?
Hill: I define win as, 10 years from now, marijuana will still be legal in Canada, there's a chance -- I mean, right now we've got, in the United States 36 states. There are, I think in the next two years ...
Gillies: 14 to go.
Hill: 14 to go. And in the next two years, it's on the ballot in little states like New York, and Florida, and Ohio. [laughs] So, someone is going to be supplying. And I'm sure this is someone who is --
Gillies: Sure, a lot of someones are going to be supplying.
Hill: What's that?
Gillies: A lot of someones are going to be supplying. That's the point, this is a commodity.
Hill: So, your belief is that -- just to compare, let's just compare this to pizza, because it's the only analogy [laughs] I can think of at the moment. That if you look at pizza in the United States by market share, the biggest market share is held by independent pizza shops, just local shops. And then you've got Domino's, and Papa John's, and Pizza Hut, and sort of the chains like that. Is it your belief that there's not going to be a single viable public company that is supplying cannabis on a national level, that it's just going to be all mom-and-pop pizza shops?
Gillies: Pretty much, yes, and it's exceedingly easy to produce your own. Again, I live in a country where it is completely legal. I may have one or two acquaintances who enjoy imbibing said legal substance, and they did so before it was made completely legal. And I can tell you, the only difference in their consumption pattern has been, they grow their plants outside instead of inside now. I mean, it is something that is, I understand everyone wants to be at the forefront of what they think is going to be the next big thing, but the dynamics of these businesses that are trying to capture the space, Aurora Cannabis, I'm blanking on the other big name that I could throw out ... Tilray. The problem is these businesses incinerate capital, and there seems to be no end to that incineration. And the larger they get, because their market has expanded, Canada it is legal, 36 states are now legal. You say New York and Florida are probably coming, I think you're probably correct. And I just think they're just going to end up burning more money. So, I would not go anywhere near this entire space, but I'm a bear on the name, so.
Hill: [laughs] Before we get to Veterans Day, you and I were chatting this morning, and you made [laughs] reference to something that caught my attention immediately. You said something to the effect of, do you want to hear about my favorite [laughs] company in Nebraska that's not named Berkshire Hathaway? And all due respect to Nebraska, my first thought was like, wait! There are other public ... and, of course, I know they are based there. Other than Berkshire Hathaway, what's the Nebraska company that you love?
Gillies: Well, OK. So, this is my opportunity to not be such a negative, you know, person because I'm not a negative person, I love lots of companies, you just picked me a couple to start today that I don't love. Have you ever heard of Nelnet (NNI 3.22%)?
Hill: I've never heard of Nelnet.
Gillies: Perfect. Nelnet, ticker NNI on the New York Stock Exchange, is out of the thriving hub of Lincoln, Nebraska. Now, I had never heard of Nelnet before I stumbled upon them four or five months ago. And when I recommended Nelnet, spoiler, in one of our Canadian services, I heard from multiple of our Foolish colleagues who said, oh, Nelnet, I hate those guys, they held my student ... they held my or they held my partner's student loan debt, [laughs] and I had to send them a check every month. So, I'm like, oh! Yay! I'm sorry. [laughs] Yeah, so.
But Nelnet is this really interesting, strangely constructed business out of Lincoln, Nebraska that has a multiple, that's all these little, kind of, hidden businesses underneath a giant -- I'm going to say it's about a $2.5 billion company, it might be a little bit higher than that now, but it's about a $2.5 billion company, that if you go look at their balance sheet, they have nearly $20 billion in debt. So, you're going to scream, throw your hands over your ears and run away, right. I mean, this just sounds like, oh, my goodness, 10-to-1 leverage. That's a mirage, what that debt is, it's a giant portfolio of student loans that are no longer -- it's the type of loans that are no longer issued, but they're on the balance sheet. Okay. So, student loans -- these loans are actually Federally guaranteed, somewhere between 97% and 100% is guaranteed. So, even if all of these student loans were to default en masse what ends up happening is the government just writes a check to Nelnet to cover it, because they're on the hook for this. Same deal, if you get some sort of student loan forgiveness that impacts this portfolio, what that means is Nelnet is not, it's just, the government will have to cover this obligation.
But those loans are throwing off a ton of cash flow, because the average is about 10 years in those loans, and those loans are going to roll off over 20 years, but most of that cash is coming upfront because of a particular wrinkle in how these loans are financed. Basically, if you're a student borrower, Chris, your loan is probably at a fixed rate, OK, say 5%. But these things are securitized and chopped up by Nelnet, and so they are largely paying a floating rate to finance these loans. So, as the world has seen interest rates drop, what that means is the spread, the amount of cash that's coming to Nelnet, because they are in basically the spread between what you're paying as a borrower and what they have to pay as the financier. That spread has gotten wider. And so, what's coming to Nelnet, in terms of the amount of cash, this is about a $70 stock today, I think, they've got about $42 -- by my estimate, they've got about $42 in cash per share coming to them in about the next five years, assuming that low interest rates persist. And we've already heard from the U.S. Fed that you should probably expect interest rates to stay low, near 0%, probably through 2023, which will give Nelnet enough time to bring a lot of this cash in.
And so, what are they doing with that cash, because it's all kinds of cash flow brought in. They've got a bunch of these little businesses, so they are a SaaS company, Software-as-a-Service company, who provides, you know, payment processing, so, like, tuition payment plans products and what have you, to a lot of K-12 private schools, as well as -- they got about 11,500 K-12 private schools, they have about 1,300 higher education institutions. Those are very sticky clients. You put in a payment processing or a tuition processing software, you're not ripping it out in six months because a competitor gave you a 5% discount.
They have a fiber to the premises arm, called Nelnet Communications, which they've just sold about half to a private equity group. So, that is -- they've invested and now the cash flow is exploding there. They do, do a lot of servicing of student loans. This is independent of that giant pile of student loans I already mentioned; this is the servicing for other types of loans. That business is good, but it's probably going to be a lot smaller in the future, because they've lost a couple of Federal contracts, but they are still, even if those contracts are gone, they're still servicing about $50 billion worth of Federal private education, consumer loans for about two million borrowers.
They've got a bunch of little venture capital bets, one of which is called Hudl. And Hudl is a sports performance analysis software. So, think, video analysis, scouting software for professional or minor league teams. They claim they've got more than 6 million coaches and athletes in 139 countries, 160,000 teams across 35 sports. Nelnet owns about 20% of that. So, it's a really -- and also insiders, there are a couple of co-founders who founded this business. The insiders, the one Co-Founder and the estate of the other Co-Founder who unfortunately died a couple of years ago at a relatively young age, they control about, I think it's about 44%, 45% of the shares, and they have about +80% of the voting stock. So, this is a very Foolish Founder management, and it's a company that a lot of people haven't heard of. And like I said at the beginning of this little treatise, if they have heard about, their first reaction seems to have been, oh, Nelnet, I hate those guys. [laughs] So, you know.
So, that's my favorite non-Berkshire Nebraska company.
Hill: As I mentioned it's Veterans Day here in the U.S., Remembrance Day where you are, just want to take a second and say thank you to all the veterans out there, including some of our colleagues here at The Motley Fool. Tim Sparks, Ben Ra, Nick Crow, Jeff Lovett, Nate Wallingsford, Michael Robinson, John Novak, to them, and to all the veterans listening to us around the world, thank you so much.
We were also chatting this morning about, In Flanders Fields, the famous poem, and you have a connection to this poem.
Gillies: I do. Yes. In Flanders Fields, it is not hyperbole, Chris, to say that it will probably be read -- I'm not sure how pertinent it is for Veterans Day in the U.S., but here in Canada, it is held -- it's written by a Canadian, and it is, without hyperbole, will be read practically at every Cenotaph memorial today, it will be read, I'm sure, at every student assembly to commemorate Remembrance Day.
When I used to work in, I mentioned in our chat earlier, I used to work at various private industry jobs in my engineering career. One was a manufacturing facility where at 11:00 AM on the eleventh day of the eleventh month, the machines would, to the extent possible, go silent. And over the intercom they would read In Flanders Fields, and for the moment of silence. And In Flanders Fields was written by a Lieutenant Colonel, John McCrae, who was born here in Guelph, Ontario, where I live, and the McCrae house is about two miles that way from me. In prior years I have skipped out to attend the ceremony, this morning because of some Foolish duties I was unable to, but it is a good place to go to take in the remembrance. And if anyone who is unfamiliar with the poem In Flanders Fields, I encourage you to look it up, read it, and just contemplate what some of those who went before us and won our freedoms might have to go through, so, and we say thank you.
Hill: We will end there. Jim Gillies, thanks for being here.
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'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.