In this podcast, Motley Fool hosts Ricky Mulvey and Alison Southwick, analyst Bill Barker, and personal finance expert Robert Brokamp discuss topics including:
- Investments that help you fight inflation.
- Earnings reports from General Motors and Spotify.
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 April 23, 2024.
Ricky Mulvey: We've got an electric vehicle maker with some stumbles in self-driving on today's show, and then Tesla reports tomorrow. You're listening to Motley Fool Money. I'm Ricky Mulvey joined today by Bill Barker. Bill, thanks for being here.
Bill Barker: Thanks for having me.
Ricky Mulvey: First up, let's talk about General Motors. I've found it an interesting company to observe. It reported today, and its investors are pleased with the carmaker beating top and bottom-line guidance. I'll give you the menu of things that are going on, and maybe you can pick out what's interesting to you. The sales of pickups for GM made up for a loss in China. They're keeping car prices steady. The CFO, Paul Jacobson, implied that they are moving toward profitability in selling EVs. The CFO speak for this is "year-over-year improvements in variable profit and EBIT margins." Then another big story is that Cruise, their autonomous vehicle ambitions are coming back, expected to relaunch after a bad accident in October, and that project is expected to cost $1.7 billion this year. Bill, there's your menu. What do you want to select off the menu of topics for our friends at General Motors?
Bill Barker: I guess that there's a fair fight between pickups and the loss of business in China. It's worth remembering that it was not that long ago, a couple of years, when GM was making two billion a year in profits from China, and now it's mild losses, and there's an open question about what they're going to be able to do in China, whether they should still make a run of it there. Back in 2014-2018, they were booking two billion a year, and that looked like the future of the company.
Ricky Mulvey: Now they're certainly hoping that I think it's the electric vehicles which they're making margin improvements on and the AV Cruise ambitions. Mary Barra said that she's now looking at outside investments for Cruise. It costs a ton of money. The company is trying to transition into this cash-flow engine. If you're an advisor, would you just suggest, just spin the thing off and keep some equity, but don't keep this thing as a part of your ongoing reports?
Bill Barker: I feel like that's a question above my paygrade because there's a lot of prognostication about the self-driving vehicle realm. GM is on the record, not even that long ago, as saying that they saw Cruise doing $50 billion a year in revenue by 2030. That's a lot. If they actually believe that today, based on the progress that they're seeing and an accident such as they had in the fall which puts them a little behind schedule and makes everybody remember what their regulatory risks are going to be here, but if they actually think that there's 50 billion in revenue that's available off of a $1.7 billion investment now, obviously more in the upcoming years, then they're big enough company to take on that risk for what would be a gigantic reward. Not that the 50 billion in revenue would all be profits by any measure, but that's just a big fat round number. It's a big fat round number that people, when they hear it, should take with a lot of grains of salt. When things are divisible by 10, twice, 50 billion, 2030, why that year? Why 50? [laughs] You know what? Why is it not 47 billion in the third quarter of 2029. It'd be a little bit more believable. It just seems too elegant that just 50 billion arrives in a year that ends in zero, so discount all that. We don't know whether there'll be any money coming from Cruise, but somebody has a better idea than I do.
Ricky Mulvey: 2029, 48.6 billion in revenue, you would have been happier with that.
Bill Barker: I would say, somebody's got a model that's detailed, [laughs] rather than 50. What about 40? Fifty is bigger than 40. I feel like that's where those numbers came from.
Ricky Mulvey: To GM's credit, they did put autonomous vehicles on the road, I think, before their competitors. The other part of this story is that GM wants to be a cash-flow story. Barra, in the CEO letter, is saying, "We are very focused on capital efficiency. Last year, GM committed $10 billion to share buybacks." That's a lot for any company. It's a lot for a $52 billion company. Why is GM spending so much money on this when they have their large growth ambitions? What's its signal to you?
Bill Barker: Intelligence is what it signals to me. I love it. A company that can buy back its own stock at four or five times earnings should be doing so because there are very few other returns that are available in the high teens on your investment, and that's what you're getting. If the E in the PE is sustainable, and we're looking at maybe up to $10 of earnings per share, what is it, 45 or so, $50 a share price, that's just a great investment of money which has a return that goes on forever. Eliminating those shares is still something that you benefit from 2, 3, 10, 20 years from now. Now GM does not have available the same opportunities to just relentlessly buy back shares. They're too much in the public eye, they're too much attached to the word bailout, which happened less than 20 years ago, and so when contracts come up, and the UAW is negotiating, and they're enlisting elected officials to back up their side, the fact that GM may have spent billions of dollars on buying back its own shares is going to be compared to what they should have done in the eyes of the UAW and some elected representatives, which is, you should just either pay workers more money, or hire more workers, or optimally both rather than just buyback shares for which there is no gain to employees, so just taking $10 billion in a year and just buying back as many shares as they can, which would eliminate 200 million shares this year around 15% of the company, in terms of equity and all that, it's not available. They can be big repurchasers of shares, but they're asking for the wrong kind of headlines in the next negotiation session with their employees by going all in on it.
Ricky Mulvey: If there was more talk about these buybacks later in the year from 2023 than in the summer and early fall. I want to hit Spotify earnings, but first I got to do a disclaimer for the company. They've better microphones for their earnings calls than our carmakers. The Motley Fool has a content relationship with Spotify, active recommendations in the company. I'm a shareholder and a customer, so how's that for bias, but Bill, I'm feeling pretty good today. Stock jumped about 16% this morning. Investors are happy about the growth in Premium subscribers and net income profitability. You know what the bear said a few years ago, they said this company would have so much trouble becoming profitable because licensing costs don't scale. What happened? What's going on with Spotify?
Bill Barker: They cut costs. They found, as many other tech companies which had been enjoying free ride for their stocks, going straight up based solely upon growth, whether it was subscribers or top-line, and the bottom line not keeping up with that. That came to a head in 2022, and for some companies, 2021, and they had to find profits in the size that they had grown into. Spotify came under the crosshairs of activist investors and, in fact, let a lot of people go, around 14% or so of their employees, and scaled back on some of their more questionable podcast investments. It turns out that you can do both those things and still continue to grow your active users.
Ricky Mulvey: The offer seems to have shifted a little bit, whereas music in exclusive podcasts, hoping that big name podcasts, like Call Her Daddy and The Joe Rogan Experience, would bring people onto the platform. They've essentially let those shows out of the walled garden, and say we'll take more of the ad revenue from that, and now we're going to offer audiobook listening. Users of Spotify get 15 hours of audiobook listening per month. Podcasts are not exclusive. What do you think about this strategic shift?
Bill Barker: I think it's working, and I think that the appetite for limited series podcasts is limited. It's hard to get the word out. It's a crowded field. I don't know what the average number of podcasts that even an active user is listening to on a daily or weekly basis, but it is not as many as Spotify was betting on. Whereas some of the most prestigious things in the podcast world have come in the form of limited series, it's still hard to get the word out, hard to get the advertising revenue to back up the investment that those things need. They're finding through trial and error better models, and they've got lots and lots of hundreds of billions of satisfied customers, and they seem to be growing that at a reasonable rate right now, but they don't need to grow at the rate that they grew once upon a time.
Ricky Mulvey: For the limited series, you need advertisers to come in before the show has downloads and say fund the show in a lot of cases or buy based off projected downloads, but if you're buying for a talk show, you're able to say, you'll get about this many downloads a week at this cost. It's a little bit clearer for those buyers who, as Spotify mentioned, seem to be paying less for those ads. I'm a big fan of the product. I think it's got a lot of pricing power. I think it's got a lot of user stickiness. It's not something like a streaming service, like Netflix or HBO Max where it's painless, I think, if you cut it for a month to go check out other offerings, but I'm also struggling with the valuation. This was a sub-20 billion-dollar company to start 2023, now it's above 60 billion. Daniel Ek in the call, pointing this out in a way saying, "2023 was a truly standout year and should not be a base on expectation for every subsequent year." Do you think the profitability improvements, the strategic shifts we've discussed, do they warrant this kind of jump in market cap?
Bill Barker: The jump of a quadrupling of the stock price in a year-and-a-half, probably not.
Ricky Mulvey: 20-60, yeah.
Bill Barker: We say it was a 70-something-dollar a share stock at the end of 2022, and it's a $300 stock today, 318, as I look at the chart at this moment. It's gotten a lot of rewards, of course. It had lost three-quarters of its value. It's still not up to its 2021 highs as a stock, but the business is in much better shape. It's not riding off quite the same helium of multiples. There's more there today, but I would agree that you're not finding a justification for today's stock price in the earnings yet in terms of any kind of PE multiple. It's got an outstanding position, but it's a little bit hard to see whether it truly deserves today's 60 billion-plus valuation. I think that that is something that will not stick around indefinitely.
Ricky Mulvey: The analysts may not be listening to the words coming out of Daniel Ek's mouth in the call. One thing I want to throw in here too is, if you are maybe you're a student learning about investing, you want to get familiar with earnings results in conference calls, I think Spotify does an excellent job for newer investors. They make their information very easy to digest in that, if you're familiar with their Spotify Wrapped font, they've a good user experience. Also, the earnings calls are fairly clear, and Ek does a good job breaking down the concepts he wants investors to follow him on, for those listening. If you're a newer investor, it's a good one to check out on that basis. Bill Barker, I think that's a good place to end it. As always, appreciate your time and your insights and thanks for coming on.
Bill Barker: Thanks for having me.
Ricky Mulvey: Two quick things before our next segment. First is a heads-up. We are not running a B segment on Wednesday or Thursday's show to create some space for earnings coverage, and the second thing is that I'm going to do a quick ad. Growth stocks steal the spotlight from financial media, but something way more boring is behind a whole lot of wealth creation. Dividends, the regular payments that companies send shareholders. Dividends can make companies a little more disciplined on capital allocation and provide investors long-term streams of income. Some of The Motley Fool analysts behind Stock Advisor, our flagship investing service, put together a list of three dividend stocks to buy this year. We're sending this report to Motley Fool Money listeners for free just as a thank you for checking out the show with no purchase necessary. Just go to fool.com/2024dividends and we'll email it directly to your inbox. We'll also include a link in the show bits.
Next up, inflation. It's stickier than the experts thought so what can investors do? Alison Southwick and Robert Brokamp discuss one option that you might want to consider.
Alison Southwick: So far, 2024 has mostly been a good year for the stock market. However, the last couple weeks, not so much. Since April 10, the S&P 500 has dropped almost 5% and the Nasdaq more than 6%. What happened on April 10? Well, the Department of Labor announced that the consumer price index rose by 0.4% in March, higher than expected, and it nudged the year-over-year inflation figure to 3.5% up from 3.2% in February. The CPI sneezed and the market caught a cold. Bro, what's going on?
Robert Brokamp: Well, Alison, at the end of last year, the Fed was signaling that due to the declining rate of inflation, we could expect three interest rate cuts in 2024, and some economists were predicting that the number could be as high as six. Per usual, the market tried to get ahead of the Fed, and stocks began a very strong rally toward the end of October. Unfortunately, so far this year, the rate of disinflation has stalled and currently the futures market is predicting just maybe one or two cuts this year. Some firms like Vanguard think there won't be any. Now the market is dialing back some of its perhaps premature excitement about lower rates.
Alison Southwick: When the inflation had been rising in 2021 and reaching as high as 9.1% in 2022, we kept hearing about supply chain issues caused by the pandemic. That was an easy storyline to follow. But what's keeping prices up now?
Robert Brokamp: Well, inflation in general is caused by a lack of supply or too much demand, usually a combination of both. But a couple years ago, the biggest issue was much more of the former. Today's inflation is a much more complicated mix with demand probably playing a bigger role. Really, if you look at the prices of various types of items, they have their own story so we're not going to get into all of them. But here are some of the reasons why inflation has been sticky so far this year. First of all, we all know there are plenty of conflicts around the globe; Ukraine, Middle East, Africa, and this is driving up the prices of various commodities, particularly oil. Secondly, many companies are charging higher prices beyond the rate of inflation onto their costs. Their input costs might be up 13%, but they've budged up their prices 15%. Some people call this greedflation from corporations, but really as investors this is what we want. A report from the think tank Groundwork Collaborative concluded that half of inflation is due to higher profits. There's no question that corporate profits as a share of GDP are near all-time highs. What was the high point? The second quarter of 2021, pretty close to when inflation began taking off. Then there's just the low unemployment rate currently at 3.8%. In fact, we're in the midst of the longest streak of months with unemployment below 4% since the 1970s.
Robert Brokamp: When unemployment is low, businesses often have to increase the wages to attract workers. In fact, this is one of the silver linings of the past few years, that incomes really have been rising faster than inflation for many workers, particularly lower income workers which is the opposite of what was happening before the pandemic. I personally am happy to see that.
Alison Southwick: When we were planning for this episode, Bro, you said inflation is partially our own fault and it made me think about how last week our Taco Bell order came to $50, and I did that old person thing where I immediately turned to my husband and complained that in my day, the Taco Bell menu was broken up into 59, 79, and 99 cents unless your parents were buying, in which case you splurged on the Mexican pizza for a dollar 29. Somehow, I am still anchoring to prices from my childhood and complaining about inflation like everyone else. But I'm also still going to continue to live mass, and it seems like everyone else is as well.
Robert Brokamp: Yeah, we've all done this. We've all said, "Ah, I used to pay $10 for this thing and then I bought it two months ago and it's $13 and then I bought it today and it's $15." But the fact is we're still paying it and the truth of the matter is, as long as we keep spending, companies are going to keep raising their prices. I want to be very careful here because there are many people who don't have a choice, lower-income households, almost all of their spending is essential so if gas or grocery prices go up, they have no choice but to pay them. But discretionary spending overall is still very high and pundits are trying to come up with terms to explain this, like revenge spending and doom spending. If spending goes up, savings go down. The personal savings rate is currently below 4% among the lowest levels in more than 15 years. Let me give you one real life example. Many people last year complained about the price of travel, but that didn't stop people from traveling. The TSA screened almost 900 million passengers in 2023, an all-time high, and the trade group, Airlines for America, expects travel to be even higher this year. In April 10th, the same day that the inflation report came out, Delta announced that it expects the highest second-quarter revenue in its history thanks to high demand for the upcoming summer. With demand this high, there's just no reason for companies to stop trying to raise their prices and see what they can get away with. Again, if you're an investor in these companies, that's what you would want. But as consumers, not so much.
Alison Southwick: You mentioned that workers are making more money, which sounds like a good thing. Are there any other upsides to the Fed holding off on cutting rates?
Robert Brokamp: The Fed won't be cutting as much as they hinted at the end of the last year, which means that the 4%-5% we're earning on our cash will continue as long as, by the way, you take the time to find a higher-yielding option. Nowadays, your cash can actually beat inflation, whereas over most of the past decade or two, your cash lost purchasing power. Also, while inflation stinks, we shouldn't wish for deflation, that can be really bad. First of all, it usually happens during a recession and no one wants a recession and it can cause a downward spiral because almost 70% of the economy is driven by consumer spending. People may pause their spending in times of deflation. After all, why buy something today when it will be cheaper in a month or two? People stop spending, companies struggle, and then have to lay off employees, which further reduces spending and so on. This is part of what made the Great Depression so bad and why the Fed likes to have a little bit of inflation from year-to-year.
Alison Southwick: We began this segment talking about how the recent figure for the consumer price index has put a dent in our investments. What should we be doing to help our portfolios fight inflation?
Robert Brokamp: Well, it's definitely important for your portfolio to at least keep up with inflation because in the end, we invest today in order to buy something in the future and those future prices will likely be higher. Historically, investing in the stock market has been the best way to maintain and grow your portfolio's purchasing power over the long term. However, as we've seen, inflation could be not so great for stocks in the short-term or at least stock prices. Dividends, on the other hand, are still continuing their inflation-beating ways. In 2023, the companies in the S&P 500 grew their dividend payouts by more than 5% higher than the 3.4% inflation rate for the year, and that's in line with the long-term trend of dividend growth outpacing inflation by 1-2 percentage points annually so that's still going strong. For your non-stock money, definitely seek out higher-yielding savings accounts and you can find some options at The Ascent, a Motley Fool website. Treasury bills which are treasuries that mature in a year or less are paying well above 5%, and if you don't want to buy individual T-bills, find a low-cost fund that'll do it for you, such as the iShares 0-3 Month Treasury Bond ETF ticker SGOV. But I'll highlight a couple other investments from Uncle Sam, the first being I bonds. Now we don't hear so much about them nowadays since their rates have come down from 9.62% in 2022 to the current rate of 5.27%. But the thing to remember about I bonds is that the rate is made up of two components, one that is fixed at the time of purchase, and one that changes every six months according to the CPI. The fixed portion of I bonds purchase today is 1.3%, the highest level in more than 16 years. You'll be guaranteed to beat inflation by that amount, which is actually pretty good for a super safe investment. But that rate will reset in May as in a week from now, so many experts recommend buying I bonds within the next few days if you're going to do it this year. The other investments to consider for the safe side of your portfolio are Treasury Inflation-Protected Securities. The real after-inflation yields on these are now over 2%, again, among the highest rates in well over a decade. I think I bonds and TIPS make sense, especially for those near or in retirement. But they're very unique, quirky investments so make sure you learn enough about them before investing. Start with treasurydirect.gov, which is where you can also buy both types of investments. But then visit tipswatch.com, a site run by journalist David Enna, who does just a fantastic job of explaining how these investments work and offer some thoughts about when to buy them.
Alison Southwick: All right bro, bring us home. What are your final thoughts on inflation and our portfolios?
Robert Brokamp: I would say just don't overreact to one or two months worth of inflation data. Many experts expect inflation to eventually come down further, largely due to the way housing and shelters factored into the CPI. It takes up about a third of the index and the data has a lag. Some people believe that if current shelter prices were used, inflation would actually be below the Fed's 2% target. One such person is Jeremy Schwartz at WisdomTree, so visit his Twitter account to see the explanation and we'll see how true this is over the next several months. But regardless, you should always have some inflation hedges in your portfolio, but don't go overboard. As always, you just want to set up your finances and your investments in such a way that you'll be mostly fine regardless of whatever is happening in the economy.
Ricky Mulvey: As always, people on the program may have interests in the stocks they talk about and the Motley Fool may have formal recommendations for or against, so don't buy yourselves stocks based solely on what you hear. I'm Ricky Mulvey, thanks for listening. We'll be back tomorrow.
