Mary Long (2:51)

When you were going through this car buying process on Amazon potentially didn't go all the way. I've heard a rumor that you can get a $2,300 gift card. Was that offered to you too?

Asit Sharma (3:01)

I didn't get to that point and I was scared to. Amazon has that one click function in prime. So if you're not careful, you might end up just buying the vehicle outright. Actually, I think they protect against that. I did hear about that. It's enticing. It's one thing to make you to try it out. I do want to say this about the interface. It's funny, the interface wasn't that glamorous actually. There's a much sharper and crisper interface if you go to Hyundai site. But there's a lot more choice. You can build your vehicle, you can sort around route around the different makes and models. Amazon gives you that Amazon experience where they pretty quickly show you a number of vehicles you click through. Then you get your classic prime side panels. So you can configure the vehicles by whatever your trim, your price, your parameters are and that'll shift the results to different dealerships. So you can see that while it's not so flashy as we've come to expect, those who visit the large car manufacturers websites for buying a new vehicle, it is a faster process and you're used to it. So I had some thoughts that it might be intuitive for many people to use.

Mary Long (4:15)

Okay, so we hit on how traditional car dealerships might be feeling about this news. What about less traditional ones? Like what do you think the vibe is at Carvana's corporate office this morning?

Asit Sharma (4:25)

You know, Carvana's been through a lot. I mean, they had troubles with getting their title system right a few years ago, then the economy went in reverse on them with high interest rates. Their business model nearly snapped in too. So I think because they've been through the fire a couple of times, they've been through the crucible, they're probably like, so what bar is loan? They're like another day, they're battle hardened. And two, they probably have some time. If you look at the long term horizon for how all this plays out because Amazon is going to naturally try to work with new car sales upfront. That's going to be more profitable for them. They don't necessarily want to get into the business of dealing with used cars. That requires a different type of investment in handholding.

Mary Long (5:10)

And the.

Asit Sharma (5:10)

That's where Carvana put its money. Right. To make that experience great for someone who wants to buy a used vehicle, they are prone to the vagaries of that market. So when used car prices are higher, they make money. And when the economy isn't so great, they hit the skids. But I think it's a space that's like second order for Amazon. So I don't think they're that scared yet. I think the vibe pretty much is, all right, it's 10:00am let's go grab another cup of coffee.

Mary Long (5:37)

This is second order for Amazon, as you said, but it still feels like a pretty big jump. Why do they want to bear with me, get into this race in the first place?

Asit Sharma (5:47)

Yeah, well, Mary, we've touched on this in some other conversations about Amazon. My admiration for. Okay, let me stop here. I admire Amazon. There are a lot of things I don't admire. I get in trouble when I say this. I don't like some of their business practices. I don't like some of the things that they do and how they treat warehouse employees. I think automation, for one, makes humans compete with the robots and I think they run their drivers and trucks way too hard. So having said all that, what I do admire about Amazon is that they're steadily marching towards a trillion dollars in annual sales. They're going to hit that in a few years. And I've talked before about how they're going to bypass Walmart as the world's largest retailer. So when you hit that scale, it becomes harder and harder to move the needle using the top line. If you start selling a new line of dinner cloth napkins on Amazon.com, that's not really going to help you move the needle that much now. They have to do that. But get into a big ticket item business where you have a large transaction that's crossing your books and then you make some kind of appreciable slice on that. So if we go past or vision past just working with Hyundai, then there are many other manufacturers, many other big ticket vehicle pathways for Amazon, if they get other companies to participate, where that starts to become appreciable to that top line and can move the needle on profits and cash flow. They're so big right now, it's Almost like this makes sense when you think of how huge their scale is.

Mary Long (7:21)

We already think of Amazon as the everything store. And as you've mentioned, they have their hands in so many different pots as well. If you asit are in charge of determining Amazon's next big business venture doesn't even have to be big, actually, just their next business venture, what would you say it should be?

Asit Sharma (7:39)

I think they should get into the precision agriculture business. I was not expecting you to say that, only half jokingly. I mean, look at Tesla. Okay, there's a company that also invests a lot in cloud computing, in computation and artificial intelligence, but it has this whole manufacturing bent and that also results in big ticket sales for Tesla. So Amazon has so much smarts in the world of computation. They've got everything that Tesla conceivably has or Apple conceivably has in the electronics portion of any kind of consumer good. Why not manufacture something you can sell big ticket items? It would not be that hard for Amazon to start a small prototype R and D manufacturing operation or just snap up a couple and start figuring out how to compete with, like the John Deeres of the world. I know it's crazy, but it's also Wednesday. What's your next question, Mary?

Mary Long (8:40)

Okay, well, I promised lots of car talk, so we're going to move on to stay in the same lane, but kind of move on to a different angle while all this is happening at Amazon. Meanwhile, over at gm, we got news that they're shutting down Cruise, their robo taxi unit. GM has poured between 8 and 10 billion dollars into this department since 2016. Quick trip down memory lane, Asit. When this first rolled out, what was the original dream for Cruise and what it could be?

Asit Sharma (9:05)

The original dream was for Cruise to become a platform so that GM could be more than just a company that made and sold cars if they built a fleet of robo taxis somewhere here in the US that they could then export around the world. Then suddenly GM becomes sort of this ride hailing for service business and not the sleepy old GM that we all have known all our lives. So it's a romantic dream, but it's a dream that also takes capital, smarts, patience, a lot of other things. But that was the vision. And I still applaud GM for having that vision and understanding that to compete in this new world, you've got to evolve. You've got to become more than what you were. But that looks like it wasn't quite the solution for gm.

Mary Long (9:53)

So why did GM decide to abandon this grand vision that they had.

Asit Sharma (9:58)

So it goes back to what I was just talking about. I mean, I think they had the technology that they were developing. I know they have the capital. GM outputs a lot of free cash flow each year, but this wasn't a small portion. I think the total run rate of capital expenditure on this business, on the Cruise sort of robo taxi concept, was like 2 billion bucks a year. So that's a lot of money. And then patience. Sometimes you are patient as a management team, but your shareholders aren't as patient. So remember, GM was telling investors that this business would mature by the end of the decade. And it doesn't look that close to it. So I think investors were getting antsy on how much money that GM has put into this business. I'm going to call it rough numbers, maybe 8, 9, $10 billion, and what the perceived returns could be.

Mary Long (10:51)

So those perceived returns, I mean, Mary Barra had been talking about the idea that Cruise could generate $50 billion in annual revenue by the end of the decade, by 2030, obviously, by shuttering this unit that's no longer on the table. What other project might replace that potential revenue? Was this was a success of Cruise already baked into GM stock, and does that now have to reevaluated?

Asit Sharma (11:14)

I'm going to give an answer that seems very counterintuitive here in that it was baked into the stock price. But if you look at the stock today, it hardly moved right. I think GM is down maybe 1.5%. What I mean by that is that lots of analysts who model out to 2030 use a type of reasoning where you're basically taking the probability of something happening and then multiplying that by the total expected return. So if Mary Barra says that this is going to be this multibillion dollar business, $50 billion, as you say, in annual revenue by 2030, I'm an analyst who feels very skeptical and thinks, well, I think there's only a 5% chance of that happening by 2030. I may just plug in $2.5 billion of revenue instead of $50 billion into my forecast. I think it was included. And as we got closer to 2030 and investors, yourself, myself, people who use spreadsheets, institutional investors, everyone started to model this out. We would take the probability of what we saw on the ground and then attribute that to what the stock should be valued at. So the stock could conceivably have risen if GM had stuck it out. That's one thing that's clear today. The other thing that's clear is that it's so unclear what could possibly bring that much revenue in the next one. They've got five or six years. I don't think they have a good answer to that. But investors probably feel good today that they get back maybe a billion dollars worth of cash flow after some restructuring. It's important to know that the other part of that cash burn is going to continue to go on. They're going to try to develop Cruise now as more of a technology for a new car you or I might buy. So maybe by 2030 we have a fully autonomous vehicle that GM will offer that takes all this learning and technology, but isn't going towards building this incredible robo taxi fleet. We could just buy that technology so there'll be some yield out of it. But there is no good answer now to any kind of revenue source that's going to bring 50 billion bucks more to their top line in the next five to six years.

Mary Long (13:23)

Obviously, GM is not the first company to pursue these driverless ambitions. They're also not the first company to abandon these driverless ambitions. Uber left the game in 2020 when they sold their self driving unit to Aurora. Innovation, which is backed by Amazon. Lyft followed suit a year later. Unit Argo AI closed its store a year after that in 2022. Apple earlier this year noted that it abandoned its autonomous electric vehicle pursuits. So those are a lot of big companies with a lot of big money, yet clearly like they're all exiting this race. So clearly it's having the money is not enough to get you closer to the finish line. If that's true, then what is. What do you actually need to, to make these grand visions of driverless robo taxis a reality?

Asit Sharma (14:10)

I think what you need from the start is a commitment to what's called level four of driving autonomy. So this is high driving automation. This is a condition in which you're sort of like a passenger in the car and the car doesn't need a human driver for most situations. That's really hard to do. And I think many companies get into this understanding that they're already potentially at level two. So level two is like partial driver assistance. Something goes wrong, you can grab the wheel. The transition from this level two to level three, which is, okay, you're a passenger, you're just watching what's going on. That is harder than most companies assume because to get to this level of autonomy, you need a lot of different types of technology. You need radar, you need lidar, you need sensor capability, you need a lot of artificial intelligence. You need high definition mapping. There's so many. I didn't even mention ultrasonic sensors. Let's not even get into this level of detail. But you can see from what I'm saying that there's so much involved in getting to truly driverless states that again, patience comes into play. Patience of management teams, patience of shareholders, patience with regulators. Like in the US we still don't have the full regulatory landscape worked out. We don't have the insurance landscape worked out. What happens when one of these robo taxis just collides with a crowd of people who are coming out of a concert? God forbid that should happen. But this stuff is so much harder than it looks, both on a capital level, a technological level, a patience level. This is why you see even companies with big pockets, deep pockets, just pull up stakes after a while. And kudos to Waymo, to Alphabet, because Waymo has been around. Now, I'm sure I'm misquoting this, but the earliest days since 2009, 2010 and rough numbers. Alphabet's probably invested 20 billion bucks already. But they've got their robo taxi fleet in several cities now and we're going to see that grow in the next couple of years. So if you can stick it out, you're suddenly dominating a market.

Mary Long (16:25)

Okay, so Waymo sets us up for a great segue. We've got a daily news digest called Breakfast News. It's free to subscribe, to summarize market and business news each morning. And it closes with a fun question. Today that question is all about robo taxis. So I'm going to pose to you ASA the same question that Breakfast News poses to readers this morning. Have you ridden in one? And do you think we'll be seeing them in most cities, not just these few that they're already in, but most cities anytime soon?

Asit Sharma (16:51)

Unfortunately, I haven't. I live on the east Coast, Mary. And so the centers of development started from the west coast and moved gradually to the east or Detroit. So I really don't have anything that's close by to me where I could even take advantage. But I fully intend to next time I travel out west, as long as it looks safe, you know, get out, out of the taxi and feel great. How about you?

Mary Long (17:15)

I was just in Phoenix for a half marathon a couple weeks ago and I was so excited to try and ride in Waymo. Just I am really not that excited about self driving cars in general. But just being close to away mo got me amped. I wanted to try my hand at it, or I guess not try my hand at it because I'm not doing anything. But I will say, wait. My friend and I were the bus that was going to take us back to the parking lot after this race was taking forever to get there. So I said, oh, perfect opportunity to call away Mo. And it was going to take 25 minutes to get to us. And so we wound up, you know, the bus that we had been waiting for wound up getting there in that time. So we did not try it. But, you know, if I'm in a, in a city that offers it again, I'll, I'll surely check it out. But that wait time was a little bit too much for me at the time.

Asit Sharma (18:00)

Well, maybe at one of our next full meetups, if we're in a city where there are some waymo taxis around, we'll try it together.

Mary Long (18:06)

I like that plan. Asit. Thanks so much for joining me this morning. Always a pleasure chatting with you.

Asit Sharma (18:11)

Thanks a lot, Mary. This was a lot of fun.

Mary Long (18:18)

You can subscribe to breakfast news@breakfast.fool.com I'll drop a link in the show notes for you to do that in case it's of interest. Okay. We already talked cars on today's show. How about planes? Up next, Ricky Mulvey makes good on a promise to let Jim Gillies talk about aircap, an airplane leasing company that's gushing cash.

Ricky Mulvey (18:40)

All right, Jim, we've recorded, I think, about three A segments over the past few months where I've promised that we are going to talk about this, this airline leasing company called Aircraft, primarily because it's a company that you seem to be pounding the table for. And when you're doing that, I usually listen. So this is an aircraft leasing company called Air Cap. Why are you pounding the table for it?

Jim Gillies (19:01)

Well, thanks, Ricky. I guess I am. Why was that sarcastic?

Ricky Mulvey (19:06)

Hang on. You gave me a little sarcastic thing. I'm giving you time to talk about this company that we normally don't talk about on the show. I thought it would be nice.

Jim Gillies (19:15)

Oh, okay. Well, I accept that in the manner in which you've just reframed it. So, yes, it is a company that I own as a company I've recommended multiple times, A company that I guess I sort of am patting the table on, maybe in the context of I think there's a lot out there that's enthusiastically valued. Is that a fair way to put it?

Ricky Mulvey (19:34)

Sure, that's a nice way of putting it.

Jim Gillies (19:36)

Well, you know, and enthusiastically valued companies have this proud History of a 2000, 20012002 a 2008, a 2020, 22 coming along and all of a sudden those enthusiastically valued companies get a little less enthusiastically valued. But what I kind of look at in AerCap, I think we have a really interesting convergence of a number of things that is the biggest and best player in a space facing probably the most attractive industry conditions they've had for a while while gushing cash, deploying that capital in the service of shareholders, trading at a compelling valuation with probably the best CEO in the business. But other than that, I guess I'm, you know, maybe I'm lukewarm on the company.

Ricky Mulvey (20:24)

We can break down a few of those. So why are conditions good for an aircraft leasing company right now?

Jim Gillies (20:29)

So I don't know if you are aware, but we had this little thing called Covid in 2020 and 2021 and missed that one. Yeah, I was going to say it would have been easy, right, if you weren't tuned into mainstream media. 24, 7 during the pandemic, obviously air travel kind of ground to a bit of a halt. AerCap, which had been about a 65, $70 stock pre pandemic, got taken out behind the barn and shot. I think it bottomed at like 12 or $14 or something. The first time I recommended it in Hidden Gems Canada was around 25. I think, if memory serves, and the thesis boils down to pandemics end, or if they don't, we have a whole host of problems obviously that don't really matter about investing. But the thesis was, look, pandemics end. And so what is the world looking like? Well before the pandemic, before COVID on a revenue passenger kilometer basis, an RPK basis, air Travel grows about 5% a year, doubles about every 15 years. And I'm like, look, that's going to come back. We like to travel as a species and we're going to do more of it. And in fact, post pandemic it has been excellent. I think the most recent year is about 12% growth, but I expect we'll probably get back to that 5% thing on the long term basis. And that's a good thing. That's just kind of the first piece of thinking. The second piece of thinking though is that look, here is this company that their customers, so they're buying from Boeing and Airbus and they're leasing to, you know, insert name of airline here. The airlines came out of the pandemic, I will argue, substantially structurally weakened. And the airlines, I know this sounds weird too for people or people don't think about this. Airlines don't really want to own planes.

Ricky Mulvey (22:23)

Yeah. Why is, why is that?

Jim Gillies (22:25)

Because they're expensive. They are expensive and we want our capital tied up in less assets like that. We prefer someone else owns the asset. That would be aircraft. And the airlines want to focus on running what is, I think we can all agree, a tremendously complex logistics business. Right. Whether you're moving cargo or people or people as cargo, essentially. That's my last experience on Air Canada. They want to focus on the cost structure and running that business and lease payments. Even though. Even though you're going to probably end up paying more in the long run for the asset. They are happy just to pay lease payments and take on maintenance contracts, whatever. And they're happy to pay that much smaller amount of money to a company like AerCap. And there's a few other competing ones too. Air Lease is another one. But you know, I hold that Air Cap is probably the best in the space. So essentially it's the airlines looking to rationalize their capital and their cost structures, happy to push that off to someone else. And if someone else happens to be.

Ricky Mulvey (23:28)

Air capable, in the past couple of years, they've taken about 20% of their existing share count off the market, going from that 240 number we said to about. We'll call it 190. So about.

Jim Gillies (23:40)

Yeah, that's 185. About now. 185.

Ricky Mulvey (23:42)

But now we'll say, okay, we're not doing. It's about 20%. We gotta remember. I gotta remember, people don't have notebooks out. Jim, is this company trying to go private?

Jim Gillies (23:54)

Well, that's funny. You asked that about a year ago. I think it was actually almost. Yeah, I think it was Q3 of 2023. An analyst on the call essentially said that. And Gus Kelly basically said, yeah, at the current valuation, which by the way was at the time was trading at about 0.85, 0.9 times book value and about six and a half times earnings. Gus Kelly basically said, yeah, if we don't get a better valuation in the market, we're just going to keep buying ourselves and at some point it will make sense to take ourselves private. He flat out said that. And that's pretty rare to hear from a CEO. The valuation is slightly worse today.

Ricky Mulvey (24:32)

You saying that with air quotes?

Jim Gillies (24:33)

I am saying that with air quotes. As of last week. I haven't looked this week. As of last week, the price to book ratio here was 1.06. And the price to earnings ratio was 8.2 seems fairly cheap. And I think that both of those numbers are wrong in the direction of being too conservative.

Ricky Mulvey (24:53)

Okay. And as we wrap up this segment, I know you wanted to talk about what debt means for a leasing company. Thoughts on that or anything else on Air Cap as we finally make this time for this aircraft leasing company on Motley Fool Money.

Jim Gillies (25:06)

So if you pull up AerCap's quote today, you're going to see that this is a company that's about a $17, $18 billion market cap. And then you're going to pull open the balance sheet. You're going to see this company has $43 billion in debt and people are, a subset of people are going to freak out and go, oh my goodness, look at how much debt here. This is a ridiculous idea. Gillies is an idiot and run away with their hands screaming. Thing is, when you're a lessor, debt is raw material to you. It's like steel for a carmaker. Okay. They are deploying that into assets. In this case planes or engines or even helicopters, but mainly planes, they're deploying it into assets that are readily redeployable. So if multi airlines decides to close down business, there's another airline there that will take the plane from you. We'll get it released really quickly as well. They're salable. And that's another thing that's going on with AerCap. They quite often will buy a new plane and they'll run it for the first third to two thirds of its useful life. You know, if a plane on average is good for 25 to 30 years, Air Cap will run it for 10 to 15 years, say, and then they'll sell it to airlines. And the interesting thing is they have been selling these planes historically. They were very good at selling these planes and they would sell them for about a 1.5 times book value. And as mentioned, the stock today is selling for just over one times book value. But if you're able to sell assets for one and a half times book value, that implies a couple of things. The first thing it implies is that you've been over depreciating your existing assets. Okay? You've been taking too much depreciation expense which has depressed your earnings down. Remember, this thing's only trading at 8 times earnings and those earnings are probably understated because of that over depreciation. The second thing is if I can sell my planes for one and a half to two times book value, spoiler. The most recent quarter, they're actually selling older Aircraft two times book value. What does that imply for the assets still remaining on your books? And I would argue it implies that because of that over depreciation, those assets are undervalued, at least reported there. And so I like to see what's going on with this company as they cycle capital through and part of that is going to show up as debt. But you have to understand debt is a raw material. It shouldn't be viewed as scary because at the end of the day, let's say AERCAP needed to pay off all their debt tomorrow, or at least in the near term in theory, they could sell a bunch of planes, engines, helicopters to pay off all the debt. They the portfolio is almost 3,500 airplanes, engines, helicopters. They could monetize far more than they're currently doing. The debt is not terribly a worry, frankly. And I will close with this. One of my compatriots asked me this question when he was asking questions about, about Air Cap and whether he should invest. And he says, well, you know, but what about macro conditions? What about the macro? You know, I'm not too sure I like the macro environment right now. There's some, you know, some pressures on the stock market, pressures on, you know, recessionary talk in parts of the world. And I just looked at him and said how much worse macro wise do you think it gets than shutting down the world for two years? And yet here is Air Cap making all time highs on the other side of that. Are you expecting we're going to shut down the world again? Because I suspect we're not. And if we don't, then here is this company again. Tremendous cash flows, super valuation, dominant place in their space industry, conditions in their favor with the best CEO and capital allocator in the industry. Seems pretty good to me.

Ricky Mulvey (29:02)

All right. You know what? I'm glad we didn't do this on an A segment. You needed, you needed some Runway for this one. Jim Gillies, thanks for your time and your insight. Appreciate you being here.

Jim Gillies (29:09)

Thank you.

Mary Long (29:16)

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. All personal finance content follows Motley fool editorial standards and are not approved by advertisers. The Motley fool only picks products that it would personally recommend to friends like you. I'm Mary Long. Thanks for listening. We'll see you tomorrow.

Ricky Mulvey (29:39)

Fools.