In this podcast, Motley Fool analyst Asit Sharma and host Ricky Mulvey discuss:
- Microstrategy's entrance into the Nasdaq-100.
- How Apple is trying to kick-start growth.
- A burgeoning competitor to Uber and Lyft.
Then, Motley Fool analyst Anthony Schiavone joins host Mary Long for a look at UPS and its frenemy relationship with Amazon.
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This video was recorded on Dec. 16, 2024.
Ricky Mulvey: What's it going to take for you to buy a new iPhone? You're listening to Motley Fool Money. I'm Ricky Mulvey, joined today by someone who has a salesperson texting him to purchase a brooch. Really enjoy our pre recordings before the recordings. It's Asit Sharma. Thanks for being here, man.
Asit Sharma: Ricky, it's so much fun to be here and to take my mind otherwise off of Monday morning.
Ricky Mulvey: We got a lot to talk to, Asit.
Asit Sharma: I'm paying attention.
Ricky Mulvey: First up, welcome to the NASDAQ 100 to MicroStrategy. The former enterprise software company turned Bitcoin holding company has gained mainstream acceptance by the Index. This is something that a lot of investors thought this company was going to blow up. Myself included thought that there was a lot of risk in terms of putting the amount of Bitcoin this company put onto its balance sheet, and now it is in the mainstream NASDAQ. Asit, help me make sense of this news. What do you make of this holding company being added to the Index?
Asit Sharma: Well, I look over at the S&P 500, Ricky, and they do have at least one miner. I think still in the index one gold miner. That's a proxy for the price and value of gold. If you use that logic over here on the NASDAQ side, maybe it makes some sense. Now, technically, the NASDAQ 100 is supposed to focus on non financial instruments, and MicroStrategy gets a little bit of a pass because it actually has a small operating business within it. But this is actually adding a financial company to the NASDAQ 100. It is a company, though, that has garnered a lot of attention as that proxy for the value of Bitcoin. You could say, look, overall, this is about technology, how technology changes. I have mixed feelings.
Ricky Mulvey: Here's what I don't understand. You analyze stocks for a living, so we're going to lean on that expertise here. According to Bloomberg, MicroStrategy owns about $45 billion worth of Bitcoin. This company's market cap is $100 billion. I know the enterprise software business is not a $55 billion company. Asit, help me make sense of that premium. What's going on there?
Asit Sharma: No one has told some investors that they can actually buy Bitcoin on regulated exchanges.
Ricky Mulvey: Next question.
Asit Sharma: I don't mean to be so sarcastic here. Let me give you a fair shot at that answer.
Ricky Mulvey: Asit, you can be whatever you want, as long as you're Asit. Thank you for being on today's show.
Asit Sharma: My second grade teacher told me that, and it was so inspiring. I really appreciate you reminding me of that. That's so great. I'll take another quick shot at this answer.
Ricky Mulvey: Go for it.
Asit Sharma: It's an easy way for some investors to buy into Bitcoin. There is the possibility that the yield that the company talks about, it's Bitcoin yield could be a thing in the future. As it builds this huge base of Bitcoin on its balance sheet and Bitcoin rises in value, that future yield, lending out its Bitcoin for a return is going to be worth something big. I think the ability of MicroStrategy in the future, perhaps to sell some of its Bitcoin and invest in other things that might be crypto related is enticing to some people, but all in all, it's just a bet on the future value of Bitcoin. I'd be careful.
Ricky Mulvey: Oh, I don't think Michael Saylor has any intention of ever selling Bitcoin. If you listen to him in any conversation, interview, or communication, Mr. Asit, he's a great salesperson, among other things. Maybe he's a great. That is a really good qualifier.
Asit Sharma: You have hobby as a CEO in this day and age. That, again, sounds a little sarcastic, but it's not. Let's play the logic out. If you're running a company that's in the NASDAQ 100 index, you should be a good salesperson for your products and/or services.
Ricky Mulvey: Maybe not to the extent of MicroStrategy, which has really gone all in on Bitcoin. Do you expect to see more companies as we see this mainstream acceptance among investors, among regulators, even among politicians, the incoming administration likes its Bitcoin. Do you expect to see more companies putting more Bitcoin onto their balance sheet in the years ahead?
Asit Sharma: I do. MicroStrategy wants to be the company known as a complete treasury company for Bitcoin. That means it reserves, its balance sheet, its liquid assets as a function of its treasury. How it manages its stuff is all in Bitcoin. But other companies are going to want to hedge the financial assets on their balance sheets. It's one way to look at participating in both new technology and an instrument that could store some value. We'll see more of this, not in huge measures by sensible companies that have very diversified business models, but we'll see a small trend in this direction.
Ricky Mulvey: Let's go to this Apple story. The Wall Street Journal reporting that Apple is rethinking the iPhone and getting some details into how they're doing so. Step 1, Apple is planning to introduce a thinner, cheaper phone with a simplified camera system, hoping that a cheaper price is going to draw more people to buy a new iPhone. Then step 2, which is that Apple is planning two foldable devices from the Wall Street Journal. "A larger device intended to serve as a laptop would have a screen that unfolds to be nearly the size of some desktop monitors at 19 inches and a smaller model would unfold to a display size that would be larger than an iPhone 16 Pro Max, but this would be intended to serve as a foldable iPhone." I know you're going back. You want phones to be less distracting, but are either of these interesting to you as a buyer? Do you want a foldable smartphone?
Asit Sharma: I think you have to compete if you're Apple as an innovator to keep that mantle of being the Ford device company. There's one argument that even if Apple doesn't think that a foldable phone is the best business proposition, now they almost have to come to the market with some. I like thinner myself in form factors, and I do like cheaper. What Apple is doing here is really expanding on its ability to entice customers to have to trade up, and trading up in the future might mean just trading into something that you're more comfortable with now that we've seemingly exhausted, all that innovation excitement. We've seen this petering out with every iPhone release. I like this strategy, and I think Apple should be doing this. I think they should be serving up a choice of form factors and settle on the one that the mass of consumers who are going to upgrade start to really adopt and enjoy.
Ricky Mulvey: Well, there's some significant engineering challenges here, and I wouldn't want to bet against the engineers over at Apple, but there is an issue with a lot of the a foldable phones, which is that the more that you use them, the more that you have a creased screen in the middle at the folding point. For a company like Samsung, it's seen its folding phones decline in sales as it's tried to introduce them. But when you're looking at this concept, what do you think Apple needs to figure out before presenting it to a mass market?
Asit Sharma: It might be working on that line. Apple is known for the clarity of its output. They've always been a leader in that the spectacular colors that we seem to get with subsequent generations of their devices. I think for them, this is a supply chain problem, Ricky, and it's one that we used to think Apple could solve overnight back in the day. I do think that the company has still so much it can bring to consumers in terms of innovation. I'd be working on this problem, and that would be fantastic if they could solve that. They'd immediately have an advantage over Samsung and rekindle the interest in this form factor.
Ricky Mulvey: The other way that it's trying to rekindle growth is with that Vision Pro, but it's still trying to figure out an exact path forward, the Wall Street Journal reporting that it's undecided on figuring out that exact path forward. I think it's an interesting question because there are some I would say bears on the Apple Vision Pros saying that this will be remembered in the Hall of failures. This will be a big mistake. But maybe it can work. I think there are some interesting use cases. I got to try one on myself. If you go to an Apple store, you can sign up for a demo and they give you a little fireworks show. It's pretty cool. But let's say Tim Cook, CEO has hired you, Asit, is a consultant to figure out this path forward. We need to find some growth, and your department is the Apple Vision Pro. Asit, what is going in your consultant's PowerPoint for what they can do with the Apple Vision Pro?
Asit Sharma: Tim, you have two big problems with the Vision Pro. Hello Mr. Cook, sir. We have two big opportunities with the Vision Pro. The first is we have a weight opportunity. The technology is dazzling, but I got tired after a very short trial and so I think to bring this to a mass market for consumers, we need to work on the weight factor. The second opportunity is we have a compute opportunity here. I don't think we have really kept up with bringing AI to devices. This is an opportunity for us to leverage the AI expertise the world has yet to see to be competitive with some models that will probably be introduced by Meta even by Alphabet in the near future. I think these two opportunities are ones we can capitalize on. Thirdly, I would say we need to focus a little bit more on the business market. We should bring down the price point just a hair as we improve the technological quotient of the Vision Pro and start using it for business collaboration. That's been Meta's plan all along, and I think they will be soon pushing the gas on this idea within the next two years.
Ricky Mulvey: I'll give you a free one, which is that you set up some Apple kiosks at different airports and then you let people rent the Vision Pro for different airplane flights, so they can watch a movie, play around with it while they're on a flight. That one is free, the next one is not. Asit Sharma, this comes from Breakfast News, which is our free email that you can sign up for, we'll include a link in the description. Each day, there's a question to get the people talking. Today's question is about this story, asking what will be Apple's next big revenue generator and why? Vision Pro, smart glasses, which we haven't gotten to yet, the a foldable iPhone, something else, or maybe it doesn't have one. This is a mature business.
Asit Sharma: In a smaller team research meeting at the Motley Fool, I brought up the idea of Apple losing yet a little bit more of its competitiveness when Jony Ive left the business. I was fiercely challenged by many of my fellow analysts saying that Apple still has a lot of design power and a lot of innovation power the market has yet to see, so I'm going to go with something else because obviously my friends know something that I don't about the company.
Ricky Mulvey: Let's go on to this feature story in the New York Times. I think this is interesting because it will encourage you, hopefully, as an investor, to think about how could the companies you own get disrupted? There's a new ride hailing service that's rolling out in Washington, DC that is really trying to basically out Uber. The New York Times reporting that Empower, yes, the company is called Empower now does 100,000 rides per week in Washington, and that is now more than the city's taxis. Here's the premise. Drivers pay a flat subscription fee to the company each month, which is around 350 bucks. Then they can set their own rates for rides and take home 100% of the fare. This is a very different model than Uber and Lyft, which likes to take a chunk of each fare you pay them. I think, for me, at least as a customer, ride hailing and driving is kind of a commodity game. If I'm a rider, I want the best price, and if you're a driver, you want to make the most money. But there's a lot of regulatory challenges here. Asit, when you were parsing through this story, are you seeing a real disruptor to Uber and Lyft?
Asit Sharma: I'm not sure if it's real. It is a disruptor. It is a challenger, and this is the fate of all things which aren't unique. You may be onto something, Ricky, if this is a commodity, here's the business model challenge to say, prove to me this isn't a commodity. Now, you'd mentioned to me that they've racked up $100 million in unpaid fines. I think just within Washington, DC where they began because they're pulling an Uber and a Lyft that is to go into a market, not worry about the regulations and build out the model. But whether this is real, to answer your question, that depends on when they grow up. If they can make enough money at 350 odd bucks per driver to cover all the costs that are associated with a business like this.
They haven't had to grow up yet and worry about someone who had a bad experience in an empower drive and having to enforce different types of behaviors with their drivers. The regulatory piece is a big one. We'll see. I didn't know that they've raised a bunch of money yet, a bunch of capital, the capital they would need to truly compete. But what it's interesting to see how fast they've been able to grow in just one metropolitan area. I understand that some of our colleagues have started using this as well.
Ricky Mulvey: Dylan is out in DC, and he basically looked at what a ride from his house to our headquarters in Alexandria was; Lyft, 47 bucks, Uber 26 bucks and Empower 23 bucks. The average that's mentioned in the New York Times story was, like, a 20-30% discount to use Empower rather than the big two here. But I'm telling you, if I need to get to the airport, I'm looking for price pretty immediately, and I think that if Empower comes to Denver, I would be a pretty happy customer of it. You mentioned the regulatory frameworks, Asit and yes, the start-up has racked up $100 million in fines. It is trying a legal defense, which is essentially that we are not a ride hailing company.
We are like a reservation app system because the drivers are the ones doing that. Basically, that framing is trying to absolve it from the registration requirements that basically guarantee that the drivers have commercial insurance. In DC, there's a taxi ride hailing agency that I think gets 6% of the money that goes through and Empower would rather not pay that, and that's why you're seeing the rack up in fines, also a judge ordering the company to cease operations, the company continuing on anyway. Now, Asit sometimes the end of that story is a company like Uber and Lyft, which did a similar playbook. We're rolling in, and we're going to disregard these taxi regulations. Sometimes the company ends up being like a bird scooter, where you see them everywhere, and then now you don't see them so much anymore. Is this the best way to do a disruptive start up? Do you think it's better to just thumb your nose at the regulatory frameworks and whatever happens happens?
Asit Sharma: I think if you have a direct line to Masayoshi Son in Japan, who loves just a crazy, nutty idea a punch you in the face, crazy idea. This is not a bad way. If you don't have that, though the problem is getting other investors to come in after that first wave of capital. If I'm a venture capitalist and you're pitching me this idea and you've got a contingent liability on your books for $100 million, and there's a total of 19 or $20 million invested in the business so far with an uncertain outcome. If I try to help you grow, I'm not that interested, so I don't think it's the best way for most people, but if you've got friends with deep pockets who will ride with you there, why not?
Ricky Mulvey: Asit, who doesn't have baggage. Everyone has got some problems, and you just got to work through it. I think that's a good place to end it. I appreciate you being here. Thank you for your time and your insight.
Asit Sharma: Thanks so much. This was a great fun Ricky.
Ricky Mulvey: Up next, my colleague Mary Long continues her conversation series about shipping companies. This time catching up with Motley Fool Senior Analyst Anthony Schiavone about UPS, which has a major competitor and its biggest customer.
Mary Long: The holidays have gotten me thinking a lot more about shipping and how gifts that I might order online get from point A to point B. I talked to Lou Whiteman about FedEx a couple of days ago, and now you're here to shine a light on a competitor of FedEx, UPS, United Parcel Service. Maybe let's start there on this competition piece. It's tempting, especially from a consumer side, to lump all of these logistics companies into a single bucket and say. Hey they all do the same thing. Are there differentiators here, but does UPS, we'll focus on them first, do they have a moat? If so, what is it?
Anthony Schiavone: Yeah, so I think UPS definitely has a moat around its business. We can argue about whether that moat is growing or shrinking, but this business definitely has some competitive advantages. I think the big one is barriers to entry in this business. Think about how many billions of dollars would need to be spent just to replicate their network of trucks, planes, warehouses, even their labor force. We're talking, like, hundreds of billions of dollars, and that doesn't even include the brand equity that UPS has really built throughout its 100 plus year history. I know we'll talk about Amazon in a bit, but Amazon spent more than $100 billion building out their delivery network over the last call it 15 plus years. They're still one of UPS's largest customers.
I don't think there's many companies with $100 billion just waiting around, waiting to be invested. That barrier to entry is very real. Then if you look at the competitive landscape today, it's essentially UPS, FedEx and Amazon US, and then you have DHL in Europe, so these are all really strong competitors. They're all kind of in the same business. I like UPS, though, because they have their integrated ground and express network. You have the same driver delivering both express and ground deliveries, whereas FedEx is still a little bit their networks don't necessarily talk to each other as much anymore. I think I listened to your podcast with Lou and he talked about how they're combining that over the past year. That's potentially a competitive threat to watch moving forward. But, I think this market is huge, and I think all these companies have some form of moat.
Mary Long: For those who maybe have heard these words but don't fully know what they mean in practice, what is the difference between express and ground?
Anthony Schiavone: Ground is essentially like your standard shipping. It'll arrive in 3-5 business days, that sort of thing. It's being delivered on a truck, from warehouse to a truck. Express is more like I need that package the next day, so it's flying on a plane, and then to your house. Express how that sounds, is a quicker form of that delivery.
Mary Long: If you're a business that's looking to strike a deal with any of these logistics companies, are there any factors that you're looking at, apart from speed and price, or is it really that simple?
Anthony Schiavone: I think those are two big ones. I also think that one thing a business looks at is the reliability of the service provider. I was at Costco last week, and I promise I'll tie this in and answer your question. But there was an employee holding up a sign advertising gold bars. I did a little bit of research, and it turns out that you can buy these gold bars in store or you can buy them online. If you buy them online, guess who shipping the gold bars. It's UPS. They are the trusted logistics partner to move high value goods like gold bars. The fact that Costco, which is a company that always puts its members first, chooses UPS to deliver that product. I think that's a pretty good sign that they're the trusted partner in this space. That's a reputation, a brand equity that, again, has been built for 100 plus years. I would say reliability, along with price and speed is definitely what businesses are looking for.
Mary Long: Amazon is obviously a big player in this logistics game and has carved that space out for themselves over the past several years. Amazon is UPS's largest customer. They're responsible for about 12% of UPS's revenue. Is that a positive? Is that a strength for UPS, or does that present a potential existential risk for the company?
Anthony Schiavone: Is it a risk? Yes, it's definitely a risk. Is it existential? I don't believe so. Like we talked about earlier, Amazon spent out more than $100 billion to build their delivery network, yet they're still UPS's largest customer. While they're definitely competitors, they're still partners one good example of that is Amazon's fulfillment centers. They're not really designed to process returns. They rely on UPS, and I think FedEx is getting involved with this as well, but they rely on those companies for returns. I think that's one example. Then like Lou said in the podcast, this market is so big for all of these competitors. I think that's spot on. Amazon is best in class for last mile delivery, but there's other forms of delivery, like cold changed logistics, returns, like we just mentioned, high value goods, like the gold bars from Costco. I think Amazon has maybe less expertise in those areas and its supply chain isn't necessarily equipped to handle things like that. Amazon has definitely a risk, but I don't think it's necessarily existential, at least at this point.
Mary Long: UPS got a new CEO in 2020, Carol Tome, and she's got quite an impressive track record in the business community. She labeled her strategy upon arrival at UPS better not bigger. What does better, not bigger look like in practice?
Anthony Schiavone: One thing she talked a lot about is that not all packages are created equal. You think about UPS over the past. Success was always predicated on increasing package volumes because if you generate more sales and you have the same fixed cost structure, you generate more cash. You would think, like the rapid growth in e-commerce over the last 15 years would be a huge tailwind for this business, but that hasn't necessarily been the case because a lot of that e-commerce growth has been package volume growth from last mile delivery, small package delivery. Think of like your typical Amazon purchase.
That's a very low margin delivery for UPS, because the driver needs to drive down each driveway. They need to walk to each doorstep, deliver each package. Then on top of that, you need to build more warehouses and hire more employees to handle the higher package volumes. Over that time, UPS got bigger, but their profitability didn't necessarily increase. It actually declined. When Carol Tome took over, she refocused the company on higher quality revenue or higher margin package volumes. That's things like growing healthcare delivery volumes, growing package volumes to small and medium sized businesses, consolidating warehouses, divesting underperforming businesses, all that stuff aimed at increasing profitability, not necessarily increasing revenue or volume growth. The big idea was get more efficient and generate more cash flow.
Mary Long: Tome has called the UPS dividend a hallmark of the company's financial strength. What is her approach to capital allocation and returning value to shareholders? Does that represent a change in direction from previous leadership?
Anthony Schiavone: Yeah, so I think building off the better or not bigger idea, I think Tome thinks about capital allocation the same way. Before she became CEO of UPS, she was the CFO at Home Depot for about 20 years. If you look at Home Depot's history in the early 2000s, they were a company that was mainly focused on store growth. But around that time, she and the team there, they pretty much stopped new store openings, and they really started cranking up the cash generation machine that we know in Home Depot today.
They started returning a lot of capital shareholders through dividends and buybacks and so I think she's following the same playbook here at UPS. They're not looking to grow package volume at any cost. They pay out a huge dividend now, which Tome and the board increased pretty substantially right after she took over. I think they increased it by 50% within the first year after she took over. They're repurchasing some shares here and there. I'm not sure the capital allocation approach has changed too much from her predecessors, but really the big change is the focus on quality growth, quality revenue growth, quality volume growth. I think that's really the big change here.
Mary Long: If you look at a stock chart of UPS and compare it to the returns of the S&P 500, the two track each other over the long term until you get to 2023 last year, and they sharply diverge. In the past 10 years, the S&P 500 has returned over 250%. UPS has returned 62%. Again, a lot of that divergence happened within the past year. What's the reasoning behind that gap?
Anthony Schiavone: I think it's been a perfect storm for UPS's business and stock over the last 2-3 years, call it. You've had the pandemic era. You had a package surge, volume surge during the pandemic when everybody was home buying packages. Now that's flipped and UPS is now delivering fewer packages per day than they did a few years ago. You've also had the new labor agreement that UPS signed with the Teamsters last fall, so that's increased their costs pretty substantially. You've had higher interest rates, which impacts a capital intensive business like UPS. Plus the 5% dividend yield doesn't look as attractive to income investors as it did when interest rates were closer to zero.
I think that's played in effect. But I think really over the last year, year and a half, two years, I think the big thing from a stock performance perspective, and you mentioned 2023, that's when AI came on the scene, and a lot of investors capital left mature dividend paying companies and found a home in big tech AI stocks. I think that might be part of the divergence there. Not sure if it's the driving force. But it's definitely been a challenging period for UPS's business, but I think there's a lot of negativity already baked into the stock price right now.
Mary Long: Earlier this year, UPS sold Coyote Logistics, a third party logistics provider. They sold it to RXO. What exactly is third party logistics, and why did UPS want to get out of that business?
Anthony Schiavone: Third party logistics, it's essentially refers to a business that outsources logistics services to another company. That was Coyote Logistics. It's a cyclical, capital intensive, lower margin business, and that's ultimately why UPS decided to get out of that business. It's part of their larger, better, not bigger strategy. That was a part of that. I got to say, as far as capital allocation goes, if there's one thing I would look at, I love dividends as a dividend investor, but if there's one thing I really want to look at, it's companies that divest underperforming businesses. I think that is something that creates a lot of value that really doesn't get a lot of attention, but is very important to long term value creation.
Mary Long: Anthony Schiavone thanks as always for joining us on Motley Fool Money. I really appreciate the time and the look at UPS.
Anthony Schiavone: Thanks for having me.
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 or sell anything based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. The Motley Fool only picks products that I would personally recommend to friends like you. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.
