Nasdaq (NDAQ 3.57%) partners with several banks to spin off Nasdaq Private Market as a stand-alone company. Ally Financial (ALLY 1.89%) shares rise after strong second-quarter profits. In this episode of MarketFoolery, Motley Fool analyst Asit Sharma analyzes those stories and discusses the long-term investing ripple effects of Jeff Bezos' trip to space.
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This video was recorded on July 20, 2021.
Chris Hill: It's Tuesday, July 20th. Welcome to MarketFoolery. I'm Chris Hill, with me today, the one and only, Asit Sharma. Good to see you.
Asit Sharma: Chris, good to see you. Thanks for having me on.
Hill: We got an interesting show today. We got market news, we have banking news. We're going to start with the story of the day, and that is Jeff Bezos going to space for a few minutes this morning. He and the other folks on board the New Shepherd took off shortly after 9:00 AM Eastern, landed safely in the Texas desert. Appropriate, because this is the anniversary of the moon landing. This is one of those stories that does not appear to have any immediate ripple effects for stock market investing. It seems much like the entire venture of going to space, it seems like there will be long term ripple effects. But I have to say, I'm not really a space nerd. Yet, I was completely captivated watching this event this morning.
Sharma: Sure. The immediate effects are one of wonder for so many of us. I think as it was when Richard Branson went up just a few days ago, literally. It's something that we can never stop looking at and awe the idea of going into space. It's inspiring, we should say that. But there are so many other stories rolled up into this. There's the personal bucket list for Jeff Bezos. He just crossed one off this morning. There's also the question of what do you do with your own capital when you amassed more than you could spend in several lifetimes, actually more than probably half the planet could spend in several lifetimes. This is one answer to that question. But more to the point, I think what you're referring to Chris, this has some long term implications.
This is the second flight that we've had that is proving the concept of space tourism. Jeff Bezos and crew actually went a little higher than Richard Branson and his crew went. They exceeded what's called the Karman line, I hope I pronounced that correctly, this is 62 miles above the earth. There are competing boundaries of what actually constitutes leaving earth and getting into space. Jeff Bezos has bragging rights temporarily for crossing a slightly higher line than the one recognized by NASA. But it's a story of capital allocation in the wider community. Of course, we can't ignore the various types of technologies that get honed when you have a big picture goals like this, that we won't see where these applications go, but they'll be part of the tech story in the coming years, so much that's underneath the surface, much above the surface, the surface of the atmosphere today.
Hill: Look, I understand that the logical place to go in terms of investing is the whole space tourism thing, because that's probably the closest opportunity. As opposed to, "Oh, we're going to be mining in space." The idea of mining asteroids, I think anyone who's seen the movie, easy for me to say, Armageddon, you can wrap your head around that, but that just seems so far off, as opposed to space tourism. Yet, it does seem like the opportunities, for investors anyway, might be more in essentially who's going to be building these ships that are going to take people to space, in the same way that you can invest in companies that make automotive components. It seems like manufacturing might be an even better opportunity.
Sharma: It's a great point, and I go back to proof of concept. Once you can prove that there is a viable market for something, and I'm not sure that we actually know that there is a viable market for space tourism. There's some near term demand. We'll have to see how this shakes out over the long term. But it does tend to shift lots of money into technologies, into products, as you say, into manufacturing that will end up anointing some winners. Maybe they're not so visible but fast forward, 10 or 15, 20 years, it'll be commonplace, I think, Chris, to be able to invest in companies that just make booster rockets or just make various portions of the navigation system. Just as today, you can invest in all phases of the electrical vehicle market. You can choose to buy Tesla or you can buy companies that just focus on making batteries. So I think yes, that is something that we're going to see more and more of in the coming years. This is just the beginning of a wide and long term investing opportunity.
Hill: Nasdaq Inc. comes out tomorrow morning with their second quarter earnings but they're making headlines today. Nasdaq Inc. is teaming up with Goldman Sachs, Morgan Stanley, Citigroup, and other banks to spin out its marketplace for shares of private companies. Nasdaq private market is going to become a separate stand-alone company. It's a trading platform for private companies, and I'm assuming the goal here is to drive more transactions.
Sharma: Yeah, this is a very interesting business. Nasdaq, of course, specializes in the trading of public companies, but they've had this private market division, which essentially provides liquidity to companies that are in the pre-IPO stage. It's really hard to buy and sell blocks of shares within companies that have been growing rapidly but don't get half of the public market. Nasdaq has been an institutional facilitator, if I can throw a lot of syllables together, in this space allowing people to trade blocks of shares. Of course, you've got to be an accredited investor so not just anybody can participate in this private market. But it's been a growing business for Nasdaq, and I think it's one that will flourish with some new money from these partners and also the ability for the management team of this division to allocate its own resources and grow the business. They do have some competitors and, of course, there's a wave of companies that draw individual investors together and now crowdsource investments into private companies, but I like this move from Nasdaq. I've been a fan of their CEO, Adena Friedman, who took over a few years ago. Chris, she's pushed this company from something beyond just a volume business that existed on trading fees and needed volumes of trading to be higher each quarter to win into a company that increasingly is focused on analytics, providing data, providing software as a service to big institutional companies in data security.
There are so many things when you look at Nasdaq today, so many pieces that really weren't as prominent as they were a few years ago. I just see this as another savvy move by Adena Friedman to unlock some value for shareholders. I think it's going to be an interesting company. I really, I think, look forward to porting over its financials when that's made available. I like the partners, SVB Group, that's short for Silicon Valley Bank, a player in financial technology and, of course, Citi, Goldman Sachs, Morgan Stanley. You've got some big hitters coming in and participating in this company, so it should be a fun one to watch.
Hill: Well, it also speaks to how investing has broadened over the years. We've seen the trend over the past two decades of fewer and fewer public companies in the markets. If you go back 20 years, there were somewhere in the neighborhood of 10,000 public companies. That number is now, I think, below 8,000 despite the fact that we've had certainly more IPOs and more SPACs over the past 15 months than I would have guessed at the beginning of the pandemic, but I think this speaks to the opportunity and really the appetite that investors are having in an increasing way for private companies. I think you and I were talking recently about the whole notion of the word unicorn because a unicorn used to be a company that, in the private markets, reached a valuation of $1 billion. That's now really very commonplace. This move to raise the profile of the Nasdaq private market, I think, speaks to the appetite of people looking for smaller companies that are private and looking for the investing opportunities.
Sharma: Yeah. Chris, it's only going to increase that trend that you were just mentioning. If you're a private company that has a culture management wants to preserve, and you'd love to stay private if you didn't have to go to the public markets asking for capital, this solution is custom-built for you. You can stay private, provide liquidity to key employees who may want to sell some shares or buy some more shares and not have to bear the burden of all the compliance that comes with being a public company or having to follow on secondary offerings of stock when you need to raise some capital. You could just do it through this market. They are actually furthering that trend, I think, giving some private companies the choice to stay private. I just believe we're going to see fewer and fewer public companies as time goes on. Of course, the ones that remain, they'll get bigger and bigger through consolidation. I also think that the ability to generate cash flows due to a lot of innovation and technology is going to make the market cap of favorite companies just grow over time. It's not that the public markets will disappear, but it brings a lot more choice for those who are running these companies, and I do think it gives investors choice.
Again, before we leave this topic, you still have to be an accredited investor and have a certain net worth in most cases and a certain type of income to participate in opportunities like this, but I also believe that Nasdaq's spinoff of this private market will encourage more of the smaller competitors who don't have the accredited investor requirement to bring small investors into the fold to make investments in private companies. That's another evolving space to watch in this never-ending game of public and private markets.
Hill: Before we leave, Nasdaq Incorporated shares up a couple of percent this morning, hitting an all-time high. Anything, in particular, you're going to be watching when they report earnings tomorrow? Among other things, the chart of Nasdaq Incorporated is just an advertisement for long-term investing. It's just a slow and steady march up into the right.
Sharma: Yeah. Over the last five years on a total return basis, Nasdaq has returned 193% to investors in a very quiet fashion. I think that as long as they continue this strategy of gradually raising their trading volumes while selling to their corporate customers new solutions, they're also an acquirer. I think they'll continue to have the operations turn out cash flows that push that slow steady move to the right that you're talking about, the upward curve on the stock chart. What I'll be watching tomorrow is in a really weird quarter where the markets were going up but some growth stocks were having a lot of trouble, just to see what those derivative trading volumes look like. The Nasdaq specializes in those. I'm also looking to see what the company's listings, that is its new issues, how that looked compared to the prior quarter. I think it'll be healthy. I always keep my eye on two segments, in particular, their investment intelligence segment and their market technology segment. These are the two segments I was referring to loosely before the investments the company is making in non-trading activities that have great recurring revenue. They lock customers in the contracts, providing them data and analytics. That's a really great part of the business. If you're an investor in Nasdaq, I think you want to be looking at that to make sure that those two segments are growing at a healthy clip because that's the characteristic of this company that allows you to sleep at night, collect the dividends and watch the stock just gradually increase, as Chris was talking about.
Hill: Shares of Ally Financial are up this morning. Second quarter profits came in higher than Wall Street was expecting. Anything in particular stands out for you in terms of this quarter?
Sharma: Yes. I never know how to pronounce it, Chris. This is yet another one that we have to figure out the pronunciation, too. Is it Ally or Allie?
Hill: I believe it's Ally. This is something that I was going to ask you later, but I'll just ask you now. I believe it's Ally because their television commercials, I think, pronounce it that way. I find it interesting that they really position themselves as a consumer finance bank, and you know this business much better than I do. Is that just a part of their business they're trying to grow or is that the most important part of their business? Because they've got the whole auto financing part of their business, and that's the origin of this company, I believe. I'm assuming the auto financing is still a meaningful part?
Sharma: The auto financing part is still huge. They had auto originations or new loan originations of almost $13 billion this quarter from records. Applications that were provided with a decision on 3.5 million decided applications is the term I was reaching for. That consumer auto business is really huge. But I think you're onto something there, Chris, and that management is watching where the growth is occurring and they're pouring more money into it, they're advertising more on that retail bank side, on the retail brokerage side and we shouldn't forget that Ally also has a mortgage business. They don't look a lot different than some community banks. If you go to the homepage of your community bank, you'll see all these services offered, auto loans, personal loans, banking services, mortgages, except they do it at a pretty fast scale as I was just mentioning and I think that what is surprising for investors, is that the smaller pieces of the company's business, such as its insurance, its retail brokerage, its deposits business, just the whole business of getting in customer deposits to grow the banking business almost have really been growing at a double-digit pace.
This quarter, through the headline on their earnings report, is a 24% return on common equity. This is a banking metric, 24% is really high. They had 900 million bucks in net income. You're looking at a company which is taking a consumer facing very simple business model and just blowing it up in all meaningful ways and we should mention here, Chris, this is another company that has very quietly rewarded shareholders. I was also looking at the five-year chart of Ally this morning. Just a tablet, better performance than Nasdaq over the past five years, 220% total return over the last five years for shareholders. Do you follow this one at all on shares? I don't own shares and kicking myself that I don't.
Hill: I don't own shares. A few years ago, I was looking at the financial industry because it was one of the other things that I just have. I wonder if I should have some shares of a bank and I know it's not going to be one of the big Wall Street banks that depends on institutional trading and that sort of thing. I'm not knocking those businesses, I'm just saying my area of expertise doesn't mesh well with that industry. I did take a look at Ally Financial. I don't remember why I didn't pull the trigger on it but it was definitely at a time when they were doing a huge push around being a consumer-friendly bank. You know what it might have been? It might have been around the time that Wells Fargo was having one of their "Ethical challenges" in terms of we're just going to create fake accounts for millions of customers.
Sharma: Finding a good bank, one that you believe in and you believe in management is harder than it looks. A few things about Ally which really stand out after a few years, Chris, if you were looking for a type of bank to invest in and you're trying to figure out, do I invest in really small banks or these big banks, there were numerous choices in the middle that is, banks that do a little bit of everything, Ally is one. But Synchrony Financial is an interesting competitor. They focus more on the consumer credit side of the equation. They provide the nuts and bolts for big companies to have their loyalty credit cards, etc. That business that Synchrony has, is just not as diversified and they've had their struggles. When you see Ally's earnings this morning, you get a sense of how many weapons it has and it's arsenal. I also want to talk about this earnings report. Do you know what I've been hearing? You and I have discussed on MarketFoolery how much demand there is for used cars and new cars, and why the prices of all cars are going up, part of it is due to this computer chip shortage. I think these earnings today also speak to that. This was the headline, the lead of the company's press release, it's consumer auto originations loans that I mentioned at the very outset, and that record number of applications. This whole business is on fire, whether you participate in the car selling business or the lending business, at some time, it's going to return to normal but just now we are still looking at such a big imbalance between supply and demand in both the new and the used car industry, a continuing story this year.
Hill: Definitely, awesome to keep watching. Asit Sharma, always great talking to you. Thanks for being here.
Sharma: So much fun, I really appreciate it, 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 for this edition of MarketFoolery. This show is mixed by Dan Boyd. I'm Chris Hill, thanks for listening. We'll see you tomorrow.