Good News for Airbus and Boeing

The U.S. and European Union settle a 17-year trade dispute involving Boeing and Airbus. Shares of CD Projekt rise on reports that Cyberpunk 2077 is being added back to the PlayStation store. In this episode of MarketFoolery, Fool analyst Yasser El-Shimy analyzes those stories and talks about Vroom, Carvana, and the increasing prices of used cars.

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This video was recorded on June 15, 2021.

Chris Hill: It's Tuesday, June 15th. Welcome to MarketFoolery. I'm Chris Hill. With me today, Yasser El-Shimy. Good to see you, sir.

Yasser El-Shimy: Good to see you, Chris.

Hill: We've got video game news, we've got automotive news. We're going to start in the aerospace industry. The United States and the European Union have resolved a 17-year trade dispute involving Boeing and Airbus. They're suspending tariffs for the next five years. Not surprisingly, on the resolution of the dispute, shares of both Airbus and Boeing up a little bit this morning.

El-Shimy: It's a day to cheer for sure for both Airbus and Boeing shareholders. Let me just say that this business after a monopoly is a duopoly and that's exactly what we have here. Airbus has a 45% market share to Boeing's 43%, and so policymakers on both sides of the Atlantic are not actually trying to get more competition in that sector. In fact, both American and European governments have for long showered both companies with subsidies and they've been litigating each other over at the world trade organization. We've seen over the past couple of years, the Trump Administration had imposed duties worth roughly $7.5 billion on European products after the WTO ruled that the E.U. had given unfair subsidies to Airbus, and shortly afterwards the E.U. imposed tariffs about $4 billion dollars on U.S. products. Also on the back of another WTO ruling that the U.S. had given illegal aid to Boeing. But what we're seeing now is that probably, both sides and finally woken up to realize that this cozy duopoly in the plane making industry cannot be taken for granted any longer. We have seen a slew of many plane manufacturers springing up in China, Russia, Japan, Canada, and Brazil over the past decade or so, and I imagine the success of the Commercial Aircrafts Corporation of China, or COMAC, is really weighing on the minds of Western government officials here.

Hill: I have to say as an investor, I absolutely agree with you, with your opening statement, that any time you can invest in a monopoly, you should do it. Anytime you can invest in a duopoly, you have to take a long look at it. Yet even though these have been the two dominant players for a long time, I've never felt compelled to buy shares of either. Over the long term, they've rewarded shareholders, but this seems like the stock should be up more. I get that they're up slightly on a day when the market as a whole is down, so maybe if the market was flat, we'd be talking about these stocks up 2%, 3%, something like that. But I don't know, it doesn't seem like the buy signal that maybe some would have thought would come at the end. Again, it's a 17-year trade dispute between the E.U. and the U.S.

El-Shimy: As I said before, it's the second best thing after a monopoly. For all of those investors who've bought shares in the FAANG names, Facebook, Amazon, Netflix, and so on, they have benefited tremendously from the fact that many of these companies effectively own the sector that they operate in. For example, Google Search has a market share of over 90% of searches in the United States. That's just incredible. However, the reason many investors may have not been as keen on this, as I said, duopoly of companies, Airbus and Boeing, may be related to the fact that the aviation industry in general tends to be cyclical as opposed to a secular growth similar to those software companies. They can be exposed to fluctuations and economic cycles and travel demand and so on. But I would say also that over the past 10 years or so, both companies have done very well in terms of share price and performance. But also, demand for global travel has just exploded, and that is thanks to a more connected world we live in, the population growth all around the world, but also the fact that many people in countries like China, India, and elsewhere now have economic means to travel around the world, and we would like to do so. This has definitely benefited both companies tremendously.

Hill: Vroom is in the news today. The online used car dealer intends to offer $500 million in convertible notes, and then use the proceeds for a range of corporate purposes including investing in new technologies. Shares of Vroom down 5%. What do you read into that? Because one way to read that is, investors don't have faith that management is going to do a good job of spending half $1 billion.

El-Shimy: Yeah. Again, for those who may not be familiar with Vroom, Vroom is an e-commerce platform for buying and selling used cars in the U.S. They have about a $5 billion market capitalization. So when you get $500 million, when you issue $500 million in debt, that's a big chunk of change for our company that size. Here's the thing, Chris, it's really expensive to run a national dealership for used cars with all the logistics regulations and customer services associated with that, just as Carvana. But Carvana is actually close to becoming profitable as it benefits from scale and very high rates of customer satisfaction compared to other dealerships in the business. This success, I would say, of the Carvana model that has inspired many copycats in the business, including Vroom, Shift Technologies, and even in Europe, companies like Cazoo in Britain and UltraOne in Germany, there has been a secular shift as well in the way that we buy and sell cars. I'm happy to talk about that if you'd like.

Hill: Please do. Because one of the thoughts I had when I was looking through the story on Vroom and other stories over the past few weeks about car-buying in general is this seems like not to keep pressure on the management of Vroom or Carvana or any other place for that matter, but this really seems like a good environment for people in this line of work. There is a huge demand for cars. There is not a ton of supply, or certainly less supply than we've seen in the past. So, if Vroom and Carvana can't get closer to profitability over the next 12 months, they may not be going about this the right way.

El-Shimy: You're absolutely right, Chris. All over the news recently, we've been hearing about housing prices and lumber prices and all of those other things whose prices soared lately and used cars are actually no exception. They're hard to find and they are expensive to purchase. Just a few months ago, I wanted to trade in my car for a minivan as my family grew. I requested a code in December for my car from an online dealership and it was good. But not one that wowed me, let's say a month later and many miles later on the car, I put in another request for code and the code came back up full 10% and I sold. I'm sure if I were to sell that car now, I would get even more for it. I've been hearing anecdotally from friends and their cars are worth as much now as they were when they bought them two or three years ago. Just absolutely crazy. But against all of this is the background of a structural shift that's taking place in the way we purchase and sell our cars. 

The pandemic lockdown has effectively accelerated the trend where online used car dealerships increasingly gained market share against your average neighborhood dealership. This trend has now been supercharged by many factors. So for example, we have shortage in new cars because of the microchip shortage. We have low interest rates which makes it easier to borrow money and finance a car. We have stimulus checks that came to many households in America and enabled people to put a down payment on a car. You also have an economic recovery that's under way and many people are feeling better about their finances and many people have more savings than ever before. Finally, I would say the acceptance of e-commerce as a model of transactions even for expensive large purchases. This has been validated across-the-board. Many Americans are shifting toward e-commerce as their first choice of how to conduct business and how to transact and the used car industry is no exception here.

Hill: When you look at the various businesses involved here, are there enough factors going in the direction of businesses like Carvana and Vroom that as an investor you think to yourself, OK, I want to put a little money to work in this industry, or do you look at this and say, no come back to me when you are profitable?

El-Shimy: If you waited for Amazon to be profitable before you invested in it, you would have waited for a long time and you would have probably lost quite a bit of change. I'm actually very bullish on this sector and I personally own shares of Carvana and I've done so for over two years. The reason is, I believe that the unit economics of the business is actually favorable, especially to companies that can scale, as well as Carvana has so far and in fact, that company is close to becoming profitable, unlike other competitors in that business. Despite how much higher comps than say Vroom, it is actually growing twice as fast as Vroom. That is one company I really like in this market.

Hill: Here's a business we've never talked about in the more than 2,000 episodes of MarketFoolery that we've done over the past decade plus, CD Projekt, which is a video game company based in Poland. For those not familiar with CD Projekt, they may be familiar with Cyberpunk 2077, which I don't know if that's their flagship game, but it's certainly a well-known game. Shares of CD Projekt are up 6% on reports that Cyberpunk 2077 is being added back to the Playstation store. I have a couple of questions here, but first, is it safe to assume that the version of the game that's being added back is a new and improved version of the game?

El-Shimy: I would hope so, Chris, because the first version that they released was an absolute disaster. That is an understatement maybe. Now, as you said, CD Projekt is a Polish company that makes video games and they have shut from, let's say, out of nowhere to become a household name with a couple of triple-A video game titles, including one you might be familiar with Chris, The Witcher, which became a Netflix show later. The other one, Cyberpunk. Now, for those who again, who may not be familiar with Cyberpunk, it's a game that makes you feel like you're in the midst of a psychedelic infused dystopian future. It was very unique, very vanguard when it was first released several years ago. The gaming community became extremely loyal to this company as a result of both of these games. Now, when gamers were sitting at home and the lockdown last year waiting for Cyberpunk 2077 and there was a lot of fanfare and a lot of pent-up anticipation for that release. Yeah, it seems that the Studio City project here released it before the game was really ready for prime time. It was notoriously buggy, in fact, almost unplayable on the next-gen consoles that both Sony and Microsoft had released last year. 

Both Microsoft and Sony pulled the title off their digital store fronts and even offered refunds toward disappointed gamers of the stock of CD predictably cratered and short interest mounted. I believe about 15% of the share float of CD Projekt is short-term, so when you have any bit of good news like we have today with Sony introducing a so-called wishlist button for the Cyberpunk game, you're bound to see a big reaction in the stock where we have what is called the short squeeze. This news means that maybe in the near future we're going to have a rerelease of Cyberpunk 2077 on the playstation platform. Whether or not this game is actually going to work, this time, remains to be seen. Whether gamers are going to rise back to embrace this title again, also remains to be seen. But for now, let's just say shorts are having a bad day and investors are cheering the news.

Hill: Maybe I shouldn't be surprised by this, but I am surprised that the short interest in a video game company like CD Projekt is as high as it is. What do you attribute that to? Is it just the thinking that they had a lot riding on Cyberpunk 2077 and they completely blew the launch of it, is the thinking that while, if they're going to be that careless with a franchise like that, then this is a company going to zero?

El-Shimy: Let's just say that the release of Cyberpunk 2077 should be a case to be a case study in business schools of what not to do as a management team. Here we had the company put a lot of effort and money into advertising the release of the game, committing their developers and their programmers to an unrealistic deadline. Then just going ahead and releasing the title before it was ready to work without problems. Now actually the story doesn't end there. Because after it became extremely apparent to so many millions of gamers out there that this title is buggy and not working properly, the management and the CEO actually stood by the title and said, no, there's nothing to fix here. There's nothing to see here. This is a good game. It only took for Microsoft and Sony to take almost an unprecedented step here for a major title, like there's to actually pull it off their storefronts and to offer refunds to gamers. It took that for the CEO to apologize and to promise that they're going to do better and go back to the drawing board.

Hill: Well, I don't have a stake in this, but just as someone who likes to be optimistic and route for the average business, I'm hoping it goes well the second time around because if it doesn't, then I think the shorts are completely justified in what they're doing.

El-Shimy: Absolutely.

Hill: Yasser El-Shimy, great talking to you, thanks for being here.

El-Shimy: Thank you, Chris.

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's going to do it with this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.