Digging Into the Porsche IPO

In this podcast, Motley Fool senior analyst Jason Moser discusses:

• The chances of the S&P 500, down more than 20% year to date, rising over the last 3 months of the year.
• How the market tends to do worse the year before a recession.
• Kim Kardashian agreeing to pay $1.2 million to settle charges from the Securities and Exchange Commission (SEC) that she failed to disclose payment for touting crypto on Instagram.

Motley Fool analyst Dylan Lewis and Motley Fool contributor Brian Feroldi take a closer look at Porsche, which was recently spun off from Volkswagen.

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.

This video was recorded on October 03, 2022.

Chris Hill: Here's a tip for all you entrepreneurs out there. If you're getting paid to promote crypto, you might want to disclose that little fact to the SEC. Motley Fool Money starts now. I'm Chris Hill, joining me today, Motley Fool Senior Analyst, Jason Moser. Happy Monday.

Jason Moser: Happy Monday, indeed.

Chris Hill: It is a happy Monday. It's the first day of the fourth quarter. The market's up, which is great because the month of September was terrible. The S&P 500 was down 9.3 percent. It was the worst month since March of 2020, and even with the two percent rise that we're seeing today, really, that just means that year-to-date, the S&P 500 is only down 24 percent.

Jason Moser: Yeah.

Chris Hill: So fourth-quarter comebacks are always popular in the world of sports. How are you feeling about the prospect for a fourth-quarter comeback in 2022 for investors?

Jason Moser: The prospect, listen, we could flip a coin and who really knows? For me, I don't really expect to see some turnaround, right? I think there's a lot of writing on the wall that's telling us we still have some stuff to get through. I think you should continue to expect volatility. I think it's worth continuing to pay attention to the disparity between the two and 10-year treasuries. We don't typically go that macro on our decision-making, but I think understanding sentiment is at least helpful, particularly in a time like this and like it or not, the disparity between the 2.10 right now, that is an indicator of sentiment. We have two Fed meetings left in this year, two more early on next year, I think those are meetings that we'll get far more attention than they normally would. I start to wonder if we won't see the Fed.

I don't expect to see, you hear that word pivot, I think, being thrown around these days like, "Will the Fed pivot now and try to get things back to a little bit more normal?" I don't know that we should expect something like that. Now, I do think that they may consider taking their foot off the gas a little bit in order to start letting these recent rate hikes play their way through the economy to see what kind of impact they are having. It's not reasonable to expect a rate hike in then the next day inflation abates. That's not how it works, there is a little bit of a lag there. But I think as we go into earnings season, I think we're going to see margin pressures continue as companies continue to deal with costs but we're also cycling through a difficult stretch here. To me, looking at the guidance beyond these results, you start to wonder if maybe that guidance starts to become a little bit more palatable. Because depending on how that macro picture shapes up, that good portend to a more encouraging 2023 even when you have everyone calling for a recession now.

Chris Hill: Bank of America had a note out this morning looking at the data for situations like where we find ourselves in now, which is to say the S&P 500 is down more than 20 percent through the first nine months of the year. They noted that with the exception of 2008, things got better over the last three months. Now, that's encouraging to me, Jason, right up until the point that I look at, well, when did this happen? When did we find ourselves in this situation? First of all, it hasn't happened that often and other than 2008, it only happened four times in history and those four times were 2002, 2001, 1974, and 1962. I appreciate the data but you tell me, Jason, I looked at this and I think I don't think this is particularly relevant just because the world of investing is so different today, even compared to 20 years ago, never mind 50 and 60 years ago.

Jason Moser: Yeah. There's no question. Things have changed a lot in a short period of time and I tend to agree with you. I don't know that if I find that information all that relevant. We were talking side of desk the other day at the office and we were looking at those charts and looking at 2008 year-to-date versus 2022 year-to-date. Then looking at how 2008 finished out to say, well, maybe this is how 2022 could finish out. I think one of the reasons we're entertaining that notion is 2008, that was a very obviously unique time and then there were some fundamental issues at play in regard to the economy. There was obviously massive bailouts going in the mortgage backed securities market. There was a lot of money pumped into the economy in order to address a lot of failures. There was a lot of money pumped into the economy here in 2020 and 2021 over COVID. At some point, you have to pay the piper there, right? At some point, you have to deal with that. I look at 2008 is perhaps a little bit more applicable, at least as a possibility, which leads me to think that I don't know that I would look at the rest of 2022 and hope for some turnaround.

I feel like we're still really getting past, getting through this hangover of all of this capital that's been pumped through the economy. The one encouraging thing, and I've mentioned this data point before and it's just something to keep in mind, we've looked at these last two quarters and we saw economic contraction, and so now, we have this debate going back and forth between some, are we in a recession now or not? Of course, we met the two consecutive quarters of contraction, but there are other qualifiers there that didn't really come into play, and so it seems like most folks would argue we're not in a recession. Maybe it's like a recession like, I don't know.

But the one thing to keep in mind is that generally speaking, historically, stocks perform worse in the year leading up to the recession. I think that matters because if in 2023, we actually do see more of these qualifiers hit in a recession is declared in that ultimately is it, it's perception does everything. If it's declared, then at least you know, it's declared. We're seeing more and more banks getting on board with calling for a recession at some point in 2023. Well, maybe this stretch that we're witnessing right now that weren't during right now, maybe this is that storm before the calmer seas, hopefully, at some point next year. It's all to say that these are parts of cycles we endure as investors. But again, these are the reasons why we invest the way that we do here because trying to make investing decisions based on macroeconomic events, it's just difficult to do sustainably well, you're trying to predict the future and you can't do that sustainably well.

Chris Hill: From the stock market, we go to the crypto market. Kim Kardashian has agreed to pay a one-and-a-quarter million dollar fine to settle charges from the SEC that she failed to disclose the fact that when she was touting Ethereum Max's cryptocurrency on Instagram to her 330 million followers, she was actually being paid to do that. If you're someone who is genuinely bullish on crypto, you've got to be happy about this, don't you? Aren't you happy about the fact that the SEC is, in this case, it's Kim Kardashian, she's certainly not the only celebrity or influencer out there being paid to tout crypto. I think if you're bullish on crypto, you're probably happy about this, aren't you?

Jason Moser: I would think, to me, this seems like something you'd want to see if you believe in the long-term opportunities of crypto in general. I have nothing against Kim Kardashian. I'm sure she's a bright woman, you have to be to have generated that kind of wealth doing something right. By the same token, I have a hard time believing that she's fully schooled on the intricacies of the crypto market. I don't know that a whole lot of people really are. We have some people out there that love to tout that they are, but it's still very difficult to fully wrap your head around and so what we've seen over the last couple of years, it's really been a money grab, from the Super Bowl commercials to just the incessant commercials that you see on CNBC, for example. If you extend it beyond just her, like I said, this is a money grab. All of the celebs and athletes getting behind it, it feels pretty clear that they don't really know what it is or the risks involved, they're just taking the money and I don't blame them for that, but there are rules that you got to adhere to.

The SEC is saying, you can't just hashtag ad and say, well, I've disclosed it. You actually have to disclose with the SEC a figure that you're being paid to do this. To me, the challenges with the crypto market is you're going to have people out here that are all for it and you got people that are all against it. I think most people know, I'm a little bit more glass half empty on it. It's just not something I can fully wrap my head around and so it's not something I'm ever going to really pursue. But you could argue that is very much a business model but depends on people pumping it in order to get more people in on buying it, that greater fool argument. It's only really worth as much as the next personal pay for it. So ad campaigns that focus on younger folks, they still have that inclination to do what celebs and athletes tell them they should do. That opinion carries more weight, particularly when you're younger as opposed to older and investing has become more accessible now than ever before.

You see this massive interest in crypto in a particularly younger demographic. It seems like the older demographic takes it with a little bit more of a healthy dose of skepticism. I think these are important things. There needs to be credence lent to this market if there is to be a long-term success in this market. I don't know that there will be, for me, it does feel like there is some sort of staying power for some part of it. Maybe it's Bitcoin or some combination of assets, but I liken it to penny-stocks versus stocks. We here at the Fool, we love stocks, but we issue penny-stocks, we tell people to stay away from penny-stocks because of their speculative nature. Crypto, I look at it the same way, we're starting to see maybe this bifurcation of the more established crypto markets and the penny-stock version of crypto markets. If there is going to be a long-term future for the crypto markets, then you want to see more rules. You want to see more adherence to rules and you want governing bodies to lend credence to it. From that perspective, it seems like this is probably the right call.

Chris Hill: Jason Moser, always great talking to you. Thanks for being here.

Jason Moser: Thank you. 

Chris Hill: If you're thinking there haven't been as many IPOs lately, you're right. Why did Porsche IPO when so many other businesses are choosing to wait? Dylan Lewis and Brian Feroldi take a closer look at the luxury automaker being spun off by Volkswagen.

Dylan Lewis: We have shares of Porsche hitting the public markets last week. This was a big debut, a big debut for a variety of reasons, the new public market has been dry recently as we just talked about. But also, this was one of the biggest public issuances in recent history in Europe. I think it was one of the largest of the last couple of decades. Porsche, for most of our listeners, probably not a name that needs a ton of introduction, but I think we can just talk through a little bit of where they sit in the auto market and some of the market dynamics there, Brian.

Brian Feroldi: Yeah, Porsche is a name that everybody listening is certainly heard of and I certainly knew that they were a car maker. I was surprised about some of the numbers that they threw out though. I knew that this is a luxury brand. I didn't realize how luxury of a brand this was and just how few cars they are making when compared to some of their competitors.

Dylan Lewis: Yeah, the dynamics are pretty incredible. If you look at the model pages on their website, you can get a sense. They start a lot of their models and the 70K range and I'd say that they have some models that are in that approachable luxury range, but they get pretty unapproachable pretty quick. They get into the six-figures pretty quickly and so they live in the same place in the market that you start to see people thinking about Tesla and Maserati, maybe not quite in the lane of the Ferrari, who's another public company that's a luxury competitor. But Brian, that's all to say, their customers are pretty well-heeled and when you're thinking about overall volume, they are not someone who is making millions of cars a year. This is a company that is making generally hundreds of thousands of cars a year.

Brian Feroldi: Despite that, they're making so relatively a modest amount of cars, this is a company that came public at a pretty sizable market cap. In fact, it actually is close to rivalling the market cap of the company that it's being spun out of.

Dylan Lewis: Yeah, so as I understand it, I think numbers might change a little bit. But Porsche is now the fifth largest automaker in the world that's public behind Tesla, Toyota, BYD, which is a Chinese auto company, and its former parent company, Volkswagen, which is incredible because it is within spitting distance of its former parent company. Current market cap fluctuated a little bit since the companies come public. But around 75 billion, which is more or less where Volkswagen currently lives and that's on a fraction of the overall revenue that its parent company has.

Brian Feroldi: Well, we are public market investors and we don't really care about unit volume. What investors care about, Dylan is revenue and profits and margins. When it comes to those things, Porsche definitely has the leg up on many, many of its competitors.

Dylan Lewis: It does and that's really where being in the luxury space sets it apart from a lot of the other carmakers out there. They ship a fraction of what the likes of Ford and GM do, but they do it at a much higher operating profit. In their case, typically, in the mid-to-high teens and they're saying maybe we can even get up into the 20 percent range. That offers a little bit more of a compelling business model than a lot of the traditional automakers. I do think though, Brian, auto-making, it's just hard. It's a tough business in general and being an elite automaker and still only having 15-20 percent operating margins really speaks to that.

Brian Feroldi: It's an incredibly tough business paid, all the more tough by the fact that right now, we are in the midst of an automobile revolution. The shift to the electrification of vehicles is fully underway. We are still in the early endings, and this is both a big opportunity for companies like Porsche, but also a massive threat.

Dylan Lewis: Yeah, anytime I see something like this where we have a company that is formerly a subsidiary and then coming out and being isolated as its own public company, I was wondering, why? What is the story, what's the narrative that's being spun by management? What we heard was that basically, we want to create some capital to help us focus on electro-mobility initiatives and so that's getting at electrifying the fleet and having more offerings that are EVs. Right now, I'd say Porsche is primarily a legacy automaker that is working its way into electrification like so many of the others, it does have some EVs out there, and they have some very ambitious goals about where they want to go with it. They say by 2030, they want to have about 80 percent of the new vehicles within the all-new electric power train, which is incredible. It's a great goal to have. Right now, I believe 23 percent of all vehicles delivered were electrified in recent quarters. They have ways to go with that. But that seems to be where they want to be putting this money that they're getting in addition to some shareholder enrichment from the people who have formerly owned shares or formerly owned the company by way of Volkswagen.

Brian Feroldi: Yeah, that 23-percent number certainly stood out to me. That was much higher than I thought it was going to be. Notably, they say that 23 percent of their vehicles delivered last year were electrified. That doesn't mean they are fully electric. Only 14 percent of their cars were fully electric. The Delta there would be for hybrids, which the company considers to be electrified. But still, that's a higher percentage than I thought the company is going to stay at this stage of the game.

Dylan Lewis: Yeah, and I think it's an important part of the narrative for almost any automaker at this point. I think we're all pretty much on the same page, EVs of the future, and we've seen it with the lofty market caps that a lot of EV-focused companies have been getting. You can understand how all of these other automakers want to get into the mix. We know that some of the money raised is going to go toward funding those efforts. Some of the money raised is going to go by way of a special dividend to Volkswagen shareholders, which, Brian, I have to say is a little confusing because we were sorting through the corporate structure for this deal, trying to understand exactly where ownership lied. One of the things that was most confusing to me as we're adding this round is realizing, OK, Porsche has a 75 billion-dollar market cap. Volkswagen has roughly a 75 billion-dollar market cap. Volkswagen owns 75 percent of Porsche. So is most of the valuation there driven entirely by the company's equity stake in Porsche? That seems bizarre to me.

Brian Feroldi: That is what the numbers suggest and that definitely had a scratching our heads at first. But it's really when you dig into the capital structure of Volkswagen that the numbers start to make sense. Yes, Volkswagen's market cap is around $75 billion. But that's not the only way to measure the size of the business. Another way is using what's called enterprise value. That's when you also factor in the company's debt and cash. When you look at that number, then valuation numbers make much more sense.

Dylan Lewis: Yeah, and I'm surprised because this is a company that has a balance sheet in the hundreds of billions of dollars and I would think given that they're having a capital injection here, we might use some of that money to shore up the company's balance sheet and make it a little bit healthier. That doesn't really seem to be the route that they're going though.

Brian Feroldi: They are paying out half of the proceeds from this deal as a special dividend to their shareholders. That makes very little sense to me. To your point, Volkswagen is facing existential crisis right now given the electrification and they are going to need billions upon billions of dollars poured into their company in order to electrify their fleet, to build out a charging network, and to really make this transition happen. The fact that they're spinning off Porsche to turn that into cash does make sense to me. What I'm scratching my head about is why are they then giving this money to shareholders when they should be using that capital themselves to accelerate their plans to electrify their fleet.

Dylan Lewis: If you're looking for other reasons as to why this deal is happening and why the spin-out is happening, I think just an understanding the dynamics of market cap and relative size of these businesses, you realize, Porsche is probably a little bit more of an attractive business than Volkswagen at this point and often you'll see companies do this so that the more attractive business is not weighed down by the business that either doesn't have attractive business model and financials or saddled with some things that make it very hard for the true player to shine in the company.

Brian Feroldi: Yeah, when you look at the market caps of these two companies, it's clear that the market was not valuing the Porsche being held up by Volkswagen when it was purely behind the scenes. Now that it's spun out, there could be a rerating of Volkswagen's position to account for its massive ownership stake in Porsche and it's even possible that overtime they might be willing to take even more of their ownership and sell it to public investors given the results that we've seen so far. That could be a way for them to raise capital down the road should they choose to. When I dig into that, I think that this spin-off makes sense.

Dylan Lewis: We talked about how we were a little unsure of the use of capital with this deal. I think one thing also to be mindful of what this deal, Brian, is these are related companies and they are going to continue to be related companies both in how the shares are held and also who is running the show at these companies, it could be the same guy.

Brian Feroldi: That's correct. Oliver Blume is the CEO of both Volkswagen and Porsche, who's going to be a CEO of two publicly traded automakers at the same time. Necessarily that has some investors raising question marks about his ability to truly remain independent and make decisions for both companies. But so far, he's been playing down that threat, but that is certainly something for investors to watch.

Dylan Lewis: Brian, when you take a step back and look at everything we just detailed here, I know we didn't go super far into the numbers, but what do you see? Is this an interesting investable idea? Is this something you're watching? Where does it sit for you?

Brian Feroldi: This is a company that I had no interest in prior to looking at the numbers and I am slightly more interested after we see it. There are some good things to say in Porsche. It's financially very strong, it's profitable, it has a very strong customer base. In fact, the company actually grew its revenue throughout the pandemic. It's further along in electrification than most of its peers and its balance sheet is going to be in pretty good shape when compared to that. However, I don't see a ton of upside potential here. I don't like the dual CEO role. The ownership structure here is very complex and is also just still question marks around the EV transition. Management is telling a rosy story about what a tailwind it's got to be for the business, but I'm more skeptical than that. This is a company that wouldn't interest me anyway. I think it is going to be a decent business and I understand why some investors are interested in it. But for me though, it's a pass.

Dylan Lewis: Yeah, I think that makes sense. To me, I'd put it in the worth studying bucket mostly because when you see a company that is capable of finding margin in an industry where a lot of companies can't, it's always worth understanding how they do that and whether that's something that can be brought to the rest of the industry or if it's any competitive advantage. In this case, the growth profile of this company is just something that I'm not as interested in. We're generally looking at single-digit year-over-year growth. The margins are good for the industry but not as good as we can see elsewhere.

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. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.