The GE Breakup: Why It's Time to Pay Attention

General Electric (GE 1.22%) CEO Larry Culp announces the company's plan to split into three companies that will focus on aviation, energy, and healthcare. PayPal (PYPL 3.02%) shares sink on third-quarter results and guidance for 2022. Motley Fool analyst Bill Mann analyzes those stories and the eye-popping rise of Roblox (RBLX 1.53%) shares after its latest earnings report.

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This video was recorded on Nov. 9, 2021.

Chris Hill: It's Tuesday, November 9th, and welcome to Market Foolery. I'm Chris Hill. With me today, the one and only Bill Mann. Thanks for being here.

Bill Mann: How are you, brother?

Chris Hill: I'm doing all right. We've got Roblox shooting to the moon, and PayPal falling from the sky, but we have to start.

Bill Mann: Halt be the right word. [laughs]

Chris Hill: Exactly. They're adding an outlet there now, PayPal. We will get to that. We have to start with what I can only describe as the end of an era. When the Dow Jones Industrial Average was formed in 1896, General Electric was one of the original 12 companies in the average, and it was there, stayed there for well over a century until it was replaced by Walgreens in 2018. This morning, CEO Larry Culp announced that GE is going to split into three separate companies. The healthcare unit is going to be spun-off in early 2023, the energy division will be spun-off in early 2024, and the aviation business will be the remaining company. Before we get to the underlying businesses, and what this means for GE shareholders and potential shareholders, because the stock is up on this news, I'm curious how you felt when you saw this news, because I felt, even though I have never owned shares of GE, I never seriously thought about owning shares of GE. I did feel a twitch of melancholy.

Bill Mann: I felt a little bit sad. General Electric Company is about to become three more specific electric companies. We will see what they do with the names. Apparently, the aircraft division will retain General Electric? It's not just the end of an era, it's also the end of the great Jack Welch experiment, and the Jack Welch experiment, remember at the moment that he retired, he was perhaps one of the most revered CEOs in American commerce. I think that it has been shown ever since then that he built sand castles in the air. That this was a company that was built on really a great deal of financial engineering, some things that just didn't turn out to be that sustainable, and so this has been the long day new mall for that type of conglomerate where your financial segment was spun off years ago. It's not shocking to me given how few conglomerates really make a go of it now that this has happened.

Chris Hill: If you go back a few years, GE was really running into trouble. We saw them selling off different parts of the business here and there. This is probably where they were headed anyway, and this is still for all of the downside for this stock. From 2004 when it was the biggest public company in America, and ever since then, where it's gone downhill. This is still a $125 billion company. This is not a small business.

Bill Mann: What about 80 percent from its low this year, bonkers to me.

Chris Hill: It makes sense that it would take some time to unwind all of this. Do you have an early sense of what is going to be the most attractive part of this business? Because, I look at the fact that Larry Culp is the CEO of General Electric, and he has picked the business, the one of the three businesses that he wants to run, and it's the aviation business.

Bill Mann: This is Joel Greenblatt in his book. You can be a stock market genius, talks about this exact situation and his advice is, follow the executives. Follow the executives because they're making a decision that should be pretty reasonably expected to be a logical move where they're spending out parts that they don't really want to manage or think are as promising. So I think that's good advice. I happen to think airline and aviation is a pretty good business up until the part that you're actually flying airplanes, supplying any component to that industry, has been proven over time to be a really good business, so that makes perfect sense to me.

Chris Hill: Is there any part of you, as an investor, that thinks, I'm going to buy a couple of shares here. Just to see, I'm not going to expect much, I'm just going to take it and see where it goes, or do you think, you know what? We got a long way to go between here and 2024 when this is all done and I'm fine sitting on the sidelines.

Bill Mann: I think there's plenty of time, so GE is a company. In the middle of the 2000s, I was on a show called Cashing In on Fox business, and one of my co-panelists, I was actually let go from the show because I was too thoughtful [laughs] for television. In airports, which you could see, I can't do things in six words, but this guy came on and said he would short GE, and I said, how in the world, are you even analyzing GE with its financial division and all of these different divisions. It is probably the highest profile company that I have been uninterested in analyzing for the better part of 20 years now. I'm not going to change just yet, or give it a little bit of time, but I do think breaking apart does. The whole purpose is to unlock value, so this is something that investors, who have never been interested in GE, should pay attention to.

Chris Hill: Shares of PayPal are down 12 percent this morning after third quarter revenue was lower than Wall Street was hoping for, guidance for the fourth quarter and for 2022 both lower than expected as well. We knew that the eBay transition was going to be bumpy this year. Dan Schulman, the CEO, said, ''The third quarter was the one where PayPal would see'' and I'm quoting here, ''The max impact on our result.'' I don't have any reason to not believe Dan Schulman but as a shareholder of PayPal, I hope he's right. I hope this is the max score. We'll see some ripple effects in Q4 and the early 2022, but what do you think in terms of the results? Did anything standout to you? Because it seems like this is one of those quarters that was really about the transition away from eBay.

Bill Mann: I happen to think that that's at least partially true, and this may not come as a fun comment to you as a PayPal shareholder. I also wonder if PayPal is in the process of being beaten alive by the likes of Shopify, which manages the full transaction, the full process, for online businesses, whereas all PayPal is really managing is the transaction. I am not sure that PayPal is the best option in any one of the segments where it is competing at this point. The flip side of that is, as we know in technology going over years, even in bleeding edge tech, which the back end of PayPal's certainly is that, you don't have to be the best, you have to be the most ubiquitous, and you have to be the default, so the fact that they are joining Amazon at the hip, that's still something that has yet to really manifest itself, and probably will be a big deal. I'm not particularly surprised by the results. They did what they said they were going to do, and that's all fine. I am a little concerned about PayPal, given the competitive forces that are coming at it from all sides.

Chris Hill: The user base is huge.

Bill Mann: The user base is huge.

Chris Hill: You touched on this, but when you look at PayPal proper, you look at Venmo, they have a massive installed base.

Bill Mann: They do. From the consumer end, that's true. But there's another part of the coin which is the merchant end, and I think that the Wix's and the Shopify's of this world are a little bit more comprehensive in how they interact with most online merchants. Now, Amazon doesn't need any of the stuff other than the transactions. For Amazon, it's just we have got this. That's a great companion for PayPal. I do wonder about how they are going to compete as we see companies like Shopify just being rampant and taking care of online businesses end-to-end.

Chris Hill: You don't look at the stock down 35 percent from its high and think, "Oh, this is the time to back up the track."

Bill Mann: Well, it's down 12 percent today and they're down 35 percent from its high. I think PayPal, like a lot of companies. Again, we have to remember that 2021 is a weird year because 2020 was so unpredictable. How much of the growth that these companies saw in 2020 were due to the pandemic and to just changes of habits that are temporary versus permanent. I'm not particularly interested in PayPal at this price. Though I do think the point that you made is exactly right and to ignore it is to be foolish in small f way that this is a company with a massive installed base, for a lot of people it is still the default.

Chris Hill: The stock of the day is Roblox shares up 35 percent as revenue in the third quarter for Roblox doubled. Of course, there are other members in their third-quarter report [laughs] but their revenue doubled.

Bill Mann: Doubled? Yes.

Chris Hill: Do the results warrant this stock movement?

Bill Mann: Yes.

Chris Hill: It does. Because I don't look at Roblox and I could be wrong about this. I don't look at Roblox as a business that a lot of people are betting against. When I saw the stock shooting up, I didn't think to myself, "Well, that's the short running for the exit."

Bill Mann: Yes, exactly. Thank goodness, something good is happening to them at last. Their stock has been and you're right, not too many people have been betting against Roblox, but at least partially this reaction was the fact that a number of gaming companies have come out and reported, and have warranted, and their results have been light and then Roblox comes out and they dropped the hammer, their earnings doubled. That is an incredible result. Again, just to go back to the theme, we don't really know what was real and what was temporary from the year 2020. But a doubling of revenues for Roblox in a gaming environment that for the summer of 2021 has across the board been a little bit weak, is really amazing. Now, the thing with Roblox is that they also put out another number which is bookings, and their bookings number and their revenue numbers are a little bit different. I happen to think that the bookings number, which is basically the subscription number, was up 28 percent, which was a little bit light, but to me, that's a scratch on a Ferrari for this quarter. It really was amazing.

Chris Hill: This is a company that went public back in March. We talk all the time about, as a general rule of thumb, you don't have to jump into an IPO because it's more complicated and more difficult to run a public company than it is to run a private company. Now, we're a couple of quarters in with Roblox. Have you seen enough from Roblox management that you feel like you have a sense of how they are doing in the public markets? I'm not talking about the stock. I'm just talking about the CEO and the CEO's team.

Bill Mann: I love this question. I do feel like they've got a handle on it. I think it's really important because people who were excited about companies almost never want to hear bad news or slightly negative analysis. Every single company has risk factors attached to it, and every single company is dysfunctional in some way. Most companies that we talk about here are dysfunctional in a way that is overcome by other forms of excellence. In the case of Roblox, their general and administrative expenses exploded since they've been public. That may be a sign that they were holding back a bunch of expenses so that their documents when they went public, were as clean and as good-looking as possible. That concerns me a little bit and that's something that I want to pay attention to over the next couple of months because you're right. I don't tend to get interested in companies after they've been public for more than a year, simply because you do see how they start to operate as a public company and it is different.

Chris Hill: I suppose there are a lot of businesses in different industries that are like this, but Roblox is one of those businesses that is more complicated than the surface where people first come to. It's basically, "Oh it's the kid's game." It's the game that my kids play. It's like, "Oh OK, yes, I get it. By the way, there are a lot of businesses that are trying to get a younger audience. It seems like Roblox is the reverse. They've got the kids. They're trying to figure out what can we create that are going to keep them when they're teenagers and into their 20s and 30s.

Bill Mann: I think that's exactly right. They have a hammer lock on an incredibly valuable segment. They would like to get more females into the mix. It is still somewhat heavily skewed toward young males, so they have plenty of places where they can go. It's no sure thing that they will get there, but I think that if you are a company that has the constituencies that Roblox has, you were very much at an advantage over ones that are trying to skew younger.

Chris Hill: Bill Mann, always great talking to you. Thanks so much for being here.

Bill Mann: Thank you, Chris.

Chris Hill: As always, people on the program may have interest in the stocks they talked about on the Motley Fool may have formal recommendations for or against. Don't buy yourself stocks based solely on what you hear. That's going to do it for this additional of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. See you tomorrow.